KUALA LUMPUR: Malaysia’s economic fundamentals remain intact despite the gloomy scenario and tough challenges faced by its capital market due to recent heavy outflow of foreign funds arising from negative developments locally and overseas, analysts said.
MIDF Amanah Investment Bank analyst Adam Mohamed Rahim said the business tendency index on the services sector which indicated strong sentiment, in addition to the commendable distributive trade, backed this favourable outlook.
“Following the spike in oil prices, investment in oil and gas is expected to gain traction. Hence, we do not discount the possibility that this will attract foreign interest into Malaysia,” he said.
He said investors reacted negatively to the termination of the MMC-Gamuda underground work contract for the MRT2 by the government and this was aggravated by Wall Street’s biggest loss in eight months as technology companies remained a drag amidst worries about rising interest rates.
“As of Thursday, the local bourse has declined much more than its Asean peers, losing by more than 3% so far this week, probably exacerbated by the MRT2 issue,” he told Bernama.
He said, as foreign funds largely depend on the prevailing sentiment in a trading period, sentiments for the upcoming week would largely centre around the review of the 11th Malaysia Plan (11MP) that might provide some indication on the path of various sectors of the Malaysian economy.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid said an announcement on the 11MP mid-term review on Oct 18 would provide clarity on policy direction, thereby providing support to local equities.
He said foreign funds had been net sellers from Monday to Thursday last week with foreign selling amounting to RM2.83 billion, retail selling amounting to RM2.31 billion and institutional sell-offs were at RM4.85 billion.
“This was primarily driven by the external factors. The Chinese economy has slowed and this has led to the People’s Bank of China reducing the reserve requirement ratio by 100 basis points last weekend,” said Afzanizam.
On the domestic front, there were mixed reactions among investors as the government had indicated that it might introduce new taxes in the upcoming budget announcement in November.
Meanwhile, MIDF Amanah Investment Bank Bhd chief economist Kamaruddin Mohd Nor said the 11MP review is also expected to provide a fillip for the ringgit which has been weighed down by external factors.
“Positive news in the form of clear direction and project announcement will excite the market,” he said.
He said the ringgit’s performance in the recent week broadly followed the movement of other regional currencies which were under pressure from the strengthening dollar in the past few months.
Kamaruddin said the US dollar index gained 3.12% to-date against a basket of other major currencies, driven by the normalisation in the US interest rate amidst good economic numbers, while the ongoing trade spat worked against emerging market currencies.
“Investors are on risk-off mode as the level of uncertainties heightened,” he said.
Therefore, he said, excluding the unknown impact from the 11MP review, the ringgit is expected to remain under pressure with sideways trajectory within a trading range of 4.13 and 4.16 vis-à-vis the US dollar next week.
Meanwhile, Afzanizam said the sell-off in equities was a region-wide phenomenon and following the uncertainty, equity markets would remain edgy next week.
“At the moment, the FTSE Bursa Malaysia KLCI (FBM KLCI) is seen to be in oversold position, therefore it really explained Friday’s rebound which saw a gain of 22.25 points or 1.3% to settle at 1,730.74 points.
“We believe values have emerged… the FBM KLCI price-to-earnings ratio currently stands at 16.4 times based on forward earnings which are lower than the +1 standard deviation of 17.1 times,” said Afzanizam.
However, risk-off trade will continue to dominate market sentiments, therefore, equities are expected to remain choppy in the short term.
Technically, the FBM KLCI might linger around its current support and resistance level of 1,700 and 1,745 points respectively next week.
Ahmed Razman Abdul Latiff, Putra Business School’s senior lecturer and manager of business development, said even though the local market had seen more than RM61.03 billion market capitalisation wiped out between Wednesday and Thursday, the situation would not last long.
“This is because what had happened in the US was caused by a mixture of internal and external issues that would not necessarily translate into a worldwide phenomenon,” he said.
Among the internal reasons why stocks had tumbled in the US was because of the ever increasing interest rates imposed by the Federal Reserve, fading technology shares and very high expectations by the investors, he added.