This article first appeared in The Edge Financial Daily on August 9, 2017
KUALA LUMPUR: Selling pressure on small- and mid-cap stocks increased on Bursa Malaysia yesterday. Market sentiment turned cautious amid worries that Abu Dhabi’s International Petroleum Investment Co (IPIC) would penalise 1Malaysia Development Bhd (1MDB) after the latter failed to make payment of US$603 million (RM2.58 billion) within the granted five-day grace period after the payment deadline.
The scoreboard across the board shows that losers were more than double gainers at 602 to 269, while another 390 counters were unchanged. Despite the weaker performance in the broader market, the FBM KLCI continued to edge higher by 0.21% to 1,781.65 points as of closing.
An investment fund manager shared that the small- and mid-cap stocks are patched down as a result of the cautious sentiment; traders were taking profit while awaiting the updates on 1MDB’s payments yesterday.
“If you look at the market at noon (yesterday), losers were almost five times gainers by 677 to 137 but after the news on the extension given to 1MDB from IPIC, the market gradually recovered,” he said.
On the sustained level of the FBM KLCI, he noted that the index is well-supported by big local and foreign institutional funds.
“The general view is that [the] 1MDB issue will not affect the fundamentals of the country’s economy. Business activities are expected to improve on global reflationary trades, and valuation is decent for the [FBM] KLCI components,” he told The Edge Financial Daily.
The lack of buying impetus has also sparked the selling of some of the small- and mid-cap companies that are currently trading at high valuations, which in turn pulled down the overall market.
Inter-Pacific Securities head of research Pong Teng Siew did not rule out the likelihood that the cautious sentiment could be triggered by the 1MDB news.
“[But] This time around, the [FBM] KLCI is well-supported. The 30 stocks are also not representative of the market. A lot of the bigger-cap counters that fell today (yesterday) were not the constituents of the index. I think the bigger funds are better prepared to support the index this time around,” Pong said.
Construction, trading and services as well as the banking sector continue to show strength. With the banking sector consisting of about 35.4% of the FBM KLCI, this could have explained how the benchmark index was sustained at its level despite the overall market moving southward.
An equity market strategist with a local investment bank, commented that 1MDB’s missed payments is unlikely to be the cause that led to the selling in the broader market yesterday as both the FBM KLCI and the ringgit have remained stable, noting that it was a different scenario back in April last year when the default of 1MDB saw both the benchmark index and ringgit tumbling.
“I think, it’s probably due to the selldown of some companies which affected the small-cap space,” he added.
Another analyst with a local investment bank concurred with the view, pointing out that the market could be dragged down by profit-taking amid a weaker trade data in China.
“The way I see it, this could be more of a profit-taking after a long stretch of rally,” he said.
On 1MDB’s payment to IPIC, under an agreement struck in April between IPIC and 1MDB, the latter has agreed to pay US$1.2 billion in two instalments, with the first about US$603 million on July 31, but the failure to do so by 1MDB saw a grace period of five days being given by IPIC to 1MDB, which expired yesterday.
1MDB is also the subject of money laundering investigations in a few countries including the US, Switzerland and Singapore. The US Deparment of Justice alleged that about US$4.5 billion was misappropriated from 1MDB in a civil lawsuit.