INVESTORS cheered Fitch Ratings’ outlook upgrade (from negative to stable) while reaffirming our sovereign rating last week by lifting shares broadly higher. The market has been girding for a downgrade and this about-turn is a rare positive amid a stream of negative news flow.

The ensuing relief rally lifted the FBM KLCI 23.5 points higher for the week at 1,734 — breaking the downtrend that had persisted for the past six consecutive weeks.

The rally, though, may be short-lived. Indeed, we saw mild profit taking emerge by Friday as investors are already looking forward, at events that could shape sentiment in the near to medium term. At the forefront would be the referendum in Greece, which will be held on Sunday.

The combative Greek prime minister shocked markets by announcing the referendum last weekend, which sent global stocks tumbling the following Monday. Sentiment, however, recovered quickly on the belief that some form of a deal can still be hashed out.

This optimism persisted through the week, despite the fact that euro officials rejected a fresh proposal by the Greek government, made after the referendum announcement. Greece has since defaulted on payments due to the International Monetary Fund.

Polls indicate the referendum outcome is too close to call. Since the market hates uncertainties, a “no” vote will likely send stocks spiralling anew. What happens in Greece has little direct impact on the rest of the world. Of greater concern would be the consequence, if any, for the eurozone, which will affect the global economy.

The other major lingering concern is the timing of the first US interest rate hike since the Great Recession. This will have a direct impact, especially on emerging markets.

Last Thursday’s jobs report showed continued improvement in the labour market, but unlikely strong enough to spur the US Federal Reserve into early action. Nevertheless, there are indications that consumer spending is picking up steam. This is an important signal on the health of the world’s largest economy, given that consumer spending accounts for more than two-thirds of economic activities.

There are also those who believe that the Fed should raise rates this year — if only to “get this show on the road”. The pace of subsequent increases could still be slow and data-driven.

Emerging markets are susceptible to capital outflows when the US rates start rising. Given that gains for the past few years were driven, primarily, by the wall of liquidity, it stands to reason that a reversal will hurt stock prices. Countries with weaker underlying fundamentals are the most vulnerable.

To a certain extent, our local bourse has suffered the effects of foreign selling, especially through May-June. Total outflows from stock market in the first six months of this year have exceeded that for the whole of 2014. The FBM KLCI is down 1.5% for the year-to-date, among the worst-performing in the region.

On a more positive note, the bond market has held up far better. Yields on the benchmark Malaysian Government Securities (MGS) fell last week after Fitch’s latest report. Yields fall when bond prices rise. Still, the high foreign holding, around 47%, is a risk worth bearing in mind.

The ringgit weakened marginally against the greenback by Friday after a short-lived rally immediately after Fitch’s upgrade.

Elsewhere, the 2Q15 rally in oil may be losing steam. Global supply continues to outstrip demand. Recent data shows rising stockpiles at key trading hubs in Europe while tanker rates have also been driven higher by increasing storage demand. The global benchmark, Brent crude futures, are now hovering around US$62 per barrel, down from as high as US$68 in early-May.

This bodes well for beleaguered consumers, though not for the country as oil and gas is a key revenue earner.

Petrol prices have gone up by another 10-20 sen per litre this month for RON95/97 — and a cumulative 20-30 sen in the last 2 months — further pushing up the cost of living for consumers already struggling to keep pace with higher prices post-GST. The government also raised gas prices, to industrial and power consumers, by about 10% effective July.

I remain cautious on the near-term outlook for the stock market and last week’s rally offers an opportunity to reduce my exposure.

I disposed of my entire stake in Lii Hen. The stock surged 11.3% last week after proposing a 1-for-2 bonus issue and 1-to-2 split. The furniture manufacturer has been doing well with the demand recovery in the US and is a beneficiary of the weaker ringgit. However, I decided to lock-in my profits, making a handsome 33.8% gain over the few short months since acquisition.

I also took profit on half of my holdings in Cocoaland. Its share price rose strongly after the company received an offer to buy its entire snack and confectionary business last month. I made 53.8% return on my investment.

Following the disposals, my portfolio is now 61% invested, down from 75% in the previous week.

Total returns for my portfolio now stand at 14.3% since inception. I continue to outperform the benchmark index, which is down by 5.2% over the same period, by some distance.

This article first appeared in The Edge Malaysia Weekly, on July 6 - 12, 2015.

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