Malaysian equities market outlook

The much awaited pre – CNY rally did not materialise but foreigners continued to withdraw funds from Emerging Markets and Malaysia was not spared. It was reported by Bloomberg, that RM1.26 billion of foreign funds had exited Malaysia in the first three weeks of 2014.

This was not an isolated event that markets across Asia felt the effects of a reversal of the Federal Reserve’s quantitative easing programme. The Stock Exchange of Thailand declined by 2.88% while the Straits Times Index of Singapore slid by 4.7% since the beginning of the year.

Federal Reserves Open Market Committee (FOMC) policy makers yesterday cut the pace of bond buying for a second straight meeting, uniting behind a strategy of gradual withdrawal from Ben Bernanke’s unprecedented easing policy as Janet Yellen prepares to succeed him as chairman.

The FOMC said it will trim monthly purchases by US$10 billion to US$65 billion, citing labor-market indicators that “were mixed but on balance showed further improvement” and economic growth that has “picked up in recent quarters.”

According to Bloomberg it was was the first meeting without a dissent since June 2011, showing the tapering strategy has brought together policy makers concerned the Fed’s record US$4.1 trillion balance sheet risks asset price bubbles with those who, like Vice Chairman Yellen, say more needs to be done to reduce unemployment.

The signs of an improving American economy may result in further pullbacks of the quantitative easing programme by the Fed. This may lead to liquidity being shifted from emerging markets to the US market.

The S&P 500 has fallen 4% this year, driven lower by a rout in emerging-market currencies that helped fuel a US$1.87 trillion selloff in global stocks in the week to January 27. The MSCI Emerging Market index had declined 6.6% this year, Bloomberg reported.

Foreigners’ now hold 45.1% of Malaysian government bonds and 23.6% of Malaysian equities.

The Malaysian economy which had been supported by low interest rates which spurred domestic demand would be affected as the government roll backs its subsidy programme.

Subsidy rationalisation resulted in the Consumer Price Index (CPI) spiking to 3.2% for the month of December. The current interest rates would translate into negative returns and economist are predicting a hike of 25 basis points for the Overnight Policy Rate (OPR) in the second half 2014.

Another factor which shows the market has a downward basis is that at current levels, the FBM KLCI valuation seems stretched. The current valuation of around 17 times is higher than its historical PER (Price Earnings Ratio) of around 16 times.

Malaysia’s export driven economy depends largely on commodities which have witnessed softening in prices in 2013. The global economy is expected to grow at 3.2% for 2014 according to the World Bank and this augurs well for the Malaysian economy. A rebound in CPO prices has been predicted for 2014 but its expected to be a mild one.

Given the economy is showing mixed signals, it would be an arduous task to gauge where the market would be headed in 2014. Malaysia has always been a low beta market with strong institutional support and any marked decline in the FBM KLCI would be well cushioned by local funds.

“We are in a correction phase as the market has had a good run recently so I view the current pullback is healthy.

“However, the current emerging markets currency crisis may have a prolonged negative effect to the FBM KLCI.