This article first appeared in The Edge Financial Daily on October 15, 2018

KUALA LUMPUR: As stock market investors prepare for more market volatility in the months ahead, high oil price remains a bright spot for Malaysia being the Asean region’s only net exporter of oil and gas (O&G), according to analysts.

With Brent crude price breaching US$80 (RM332) per barrel, they see this as a positive for the country’s fiscal balance.

RHB Research Institute head of research Alexander Chia said the current oil price of US$70 to US$80 per barrel is at the level where it is not too high that hurts the growth while strong enough to spur capital expenditure (capex) in the O&G industry.

“But if oil price were to hit US$100 per barrel, then it would be negative for global growth due to higher input costs,” he told The Edge Financial Daily.

“But right now, any global growth seems to have peaked. However, nobody’s forecasting any global recession in 2019 and so, I don’t think oil prices will collapse either,” added Chia.

His forecast for Brent crude price is an average of US$76 per barrel for 2019.

“We are definitely seeing an increase in capital spending in the O&G industry although for Malaysia the O&G players are likely to take a bit longer to recover, given that Petroliam Nasional Bhd is a lot more behind the curve when it comes to capex spending,” AllianceDBS Research head Bernard Ching said.

While most analysts are of the view that oil prices are unlikely to touch US$100 per barrel, TA Securities technical analyst Steven Soo expects the price of oil to remain elevated.

“Fundamentally, we have forecast oil prices to be at about US$80 to US$85 per barrel this year. But potentially, we could see a hike in oil prices to touch the US$100 per barrel level and even beyond that,” said Soo.

The rebound of the FBM KLCI as well as the Asian market last Friday was much anticipated by local analysts, as the knee-jerk reaction in the previous two days pulled prices far below their fundamentals.

While the trend had reversed due to the relief rally after the significant two-day selldown, volatility in the market is expected to persist as uncertainties remain. The choppy market sentiment is expected to continue ahead of Budget 2019, which will be tabled on Nov 2.

Consensus expectation is also that there is a lack of near-term catalysts for growth, until investors get more clarity on policies in Budget 2019 and amid concerns over the introduction of additional taxes.

Analysts see the local market’s movement taking its cue from external events such as Brexit, Italy’s budget crisis, the US midterm elections and progress of the US-China trade war. Rising US treasury bond yields and the likelihood of three to four US interest rate hikes from the US Federal Reserve will also affect the stock market.

MIDF Research head Mohd Redza Abdul Rahman told The Edge Financial Daily that the focus will be on how aggressive the government will raise new revenues in order to plug the RM24 billion hole in government revenue from the repeal of the goods and services tax with the sales and services tax.

“The key events such as 11th Malaysia Plan midterm review on Oct 18 and Budget 2019 on Nov 2 would be critical as this is the first time that the new government could alter the direction of the country,” he said.

UOB Kay Hian Malaysia research head Vincent Khoo said while there should be trading opportunities amid the volatile market, investors are finding it “very difficult” to commit to Malaysian equities given the less business-friendly policies and decisions that have been adopted post the 14th general election on May 9.

“The recent events have rekindled fears of the government not preserving the sanctity of contracts and introducing or upping various taxes [in Budget 2019], particularly damaging would be the capital gains taxes,” noted Khoo.

Against the expected backdrop of lower government expenditure in Budget 2019, he pointed out that various channel checks already point to significantly slowing domestic consumption and investments.

Since August, the government has announced the cancellation of the RM55 billion East Coast Rail Link and two gas pipeline projects worth RM9.41 billion, postponed the Kuala Lumpur-Singapore high-speed rail project, and barred foreigners from buying residential units in the US$100 billion Forest City project in Johor.

On Oct 7, it terminated the MMC-Gamuda joint venture’s contract to build the underground portion of the mass rapid transit Line 2 (MRT2) project after the two parties failed to reach an agreement with regard to reduction of cost.

RHB Research’s Chia said as the policies of the upcoming national budget are still unclear, many investors are second-guessing the market.

“If the market (FBM KLCI) drops significantly to the 1,650-point level, then clearly there is a lot of domestic liquidity that will try and come in and lend support to the market and one can expect some significant pullback. However, for now, it is unlikely that there is anything compelling to drive the market up ahead of the national budget announcement,” said Chia.

Last Friday, the benchmark index closed up 22.25 points or 1.3% to 1,730.74 points.

AllianceDBS Research’s Ching said investors are looking to see if the government has any growth agenda beyond just cutting costs.

“The cancellation of the MRT2 underground portion of the project had a negative impact on the market. A lot of investors have been factoring in a lot of regulatory risks; hence, regulated industries such as utilities and telecommunications will have a high risk premium right now,” said Ching, adding that the adoption of populist measures by the Pakatan Rakyat government has led to a negative earnings impact on those in these industries.

TA Securities’ Soo warned that the worst is not over. “Any V-shaped rallies present good opportunity to reduce one’s exposure, especially in sectors that are prone to more competition such as telecommunications,” he added.

“While we will have to see how the new government is going to strategise, it is said that Malaysia may benefit from the US-China trade war. I believe that policies may also be presented in Budget 2019 towards [attracting] China [to moving parts or entire operations to Malaysia],” said Soo, adding that how Malaysia benefits from the trade war could be a main catalyst or a game changer.

3Q corporate earnings to be less than surprising

Following the fairly disappointing previous two quarterly results, analysts view the third-quarter (3Q) corporate earnings to be subdued, but still expect the automative companies to see a boost in earnings due to the tax holiday period from June to August.

“I don’t see any catalyst to see the tides changing soon. If anything, the expectation is that, given the stronger US dollar against the ringgit, exporters who earn in US dollars will definitely do better,” said AllianceDBS Research’s Ching.

“For the 3Q earnings, higher consumption should see increased contribution in big-ticket items such as cars,” said Ching, expecting the automotive companies to post a better quarter-on-quarter earnings.

“But I don’t see a strong catalyst in any particular sector that will beat our expectations,” he added.

RHB Research’s Chia noted there could be some selected sectors that may see better numbers, particularly earnings for consumer-type sectors and automative, boosted because of the three-month tax-free window. “But broadly speaking, I don’t see other one-off shot in the arm for other sectors,” he added.

MIDF’s Redza expect 3Q earnings to be decent, boosted by a minimal impact of the US-China trade war and the tax holiday. “But commodities especially palm oil have been seeing price declines owing to lower soy price,” he added.