This article first appeared in The Edge Financial Daily on October 29, 2018

KUALA LUMPUR: With a cocktail of uncertainties in the global market, coupled with the lack of fresh catalysts in the domestic market, Islamic fund management company PMB Investment Bhd, a wholly-owned unit of Pelaburan Mara Bhd, does not expect a significant rally in the benchmark FBM KLCI prior to the tabling of Budget 2019, the new Pakatan Harapan government’s first budget.

In line with the global rout, the KLCI tumbled below the 1,700 psychological level last Tuesday to close at 1,683.06 points last Friday — down 49.08 points, or 2.83%, from a week ago. It is likely to remain below 1,700 until the budget is tabled on Friday, said PMB. PMB is projecting a year-end target of around 1,720 for the KLCI and believes it will be tough for the benchmark index to rebound in the near term.

“Unless there are some good surprises running up to the budget ... then it would breach the 1,700 level. Otherwise, with the net outflow everyday, I doubt it,” said PMB chief executive officer Najmi Mohamed.

“When the policies are really clear, spread down and carved in stone, then we will see foreign [funds] start flowing back. But at this juncture ... it is difficult. We have to see what is prepared for us in Budget 2019.”

Najmi also does not expect the ringgit to strengthen beyond 4.00 against the US dollar; it is likely to remain at around 4.20.

“The dust is obviously still sporadic, broad-based and we are seeing a very hollow light at the end of the tunnel. It will take quite some time before the market stabilises. It is quite erratic nowadays,” said Najmi on the current market situation.

Nonetheless, Najmi said, with the long-overdue slowdown of the bull run in the US Dow Jones, he is hopeful funds can find value in this side of the world, especially in Asean.

“If the rout [in US] continues, then it will hamper growth there. There are talks some of the funds are pulling out and coming to Asean, a region they foresee will be as big as China in five to 10 years, or as big as Europe in 10 to 15 years,” said Najmi.

“With prices in emerging markets having gone down significantly, there’s value seen. So, hopefully they will come back to Malaysia, provided we can have more friendly policies from the government for foreign investors,” he added.

With a cautious market outlook, PMB has been rebalancing its portfolio. It has been looking more into the consumer as well as export-oriented sectors, like gloves.

The fund has also been putting an emphasis on the oil and gas industry since earlier this year, with oil prices having rallied from around US$40 (RM167.20) per barrel to US$70. At the time of writing, Brent Crude was trading at around US$77.62.

“At current levels now of between US$70 and US$80, we’re comfortable with it, and it is the only one pulling up the domestic market,” said Najmi.

Besides avoiding the telecommunications sector, Najmi said PMB is moving away from the construction and property sectors, and is selective in those it invests. However, he believes the latter two sectors will see improvements in about two to three years.

PMB achieved a return on investment (ROI) of about 29% last year. This year, given the current market situation, Najmi reckoned the fund’s ROI will be at low double digits.

“Currently, our ROI is at a single-digit growth, but we don’t know what will happen in the next two months,” he added.

Following the global selldown amid a global trade war between the two largest economies of the world and the tightening of financial conditions, all eyes are on the upcoming Budget 2019 this Friday.

“Hopefully there is some reprieve in the budget. For instance, friendlier and more decisive policies,” said Najmi.

Najmi is also hoping for more open tenders for big ticket items, more acceptable tax methods, less motor vehicle tax and more.

“We can see that the government is trying hard to clog all the wastages and leakages. I think once they improve that, then the market will start to stabilise and will be on an upward trajectory. I am hoping they will start with open tender in this budget… by being more transparent, the people will be more confident with the new policies,” said Najmi.

But most importantly, no capital gains tax please, said Najmi.

“It is difficult here because we have syariah,” he said.

Malaysia also needs to be a much more mature market than it is now before this type of tax should be considered.

Najmi is also not too keen on the possible introduction of a digital tax, saying it will hamper the digital sector’s growth. Again, he thinks much more maturity in the market is needed before this sort of tax is imposed.

“I would say we are at infancy when it comes to the technology spectrum,” he said.