KUALA LUMPUR (Aug 13): The FBM KLCI, which plunged into a sea of red in tandem with most world markets, has dipped below the 1,600 support level again after two and a half months since it closed at 1,598.32 points on May 27 this year.

The benchmark index plunged as much as 15 points in a few minutes, after opening at 1,615.24 points this morning. At 11.49am, KLCI was down as much 20 points or 1.24% at 1,595.05 points.

"With the 1,600 failing to hold, we expect further weakness in view of the rising political tension in Hong Kong and the prolonged Sino-US trade war," said Malacca Securities Sdn Bhd senior analyst Kenneth Leong.

Leong also noted that the weakness in local currency has also led to foreign funds shying away from local equities.

Up to last Friday, Leong added that foreign funds have exited a total of RM6.01 billion worth of Malaysian equities.

"Should the [ringgit's] 4.20 [level] against the US dollar be breached, we expect the ringgit to slide towards the 4.30 level," said Leong.

At the time of writing, the ringgit weakened 0.22% to 4.1930 against the greenback.

The potential upside catalyst for KLCI includes both economic powerhouses, China and the US, coming into a trade truce.

"On the local front, we need to monitor the allocations under the upcoming Budget 2020 that is scheduled to be announced early October to assess the key beneficiary sectors," said Leong, adding that a recovery in both crude oil and crude palm oil prices will provide some alleviation on the Malaysian market.

In a strategy note dated Aug 9, CGS-CIMB Research said local investors met were cautious about the market and are keen to hear potential trading themes for second half of 2019 (2H19).

"Most have lightened their positions due to their cautious view but keen to add when valuations turn more attractive or earnings prospects brighten. Investors were keen on dividend yields and M&A (mergers and acquisitions) themes among the five themes we presented for 2H19," said the research house.

CGS-CIMB Research noted that there was no major pushback from investors on the KLCI target of 1,596 points (based on 15.5 times P/E) for end-2019, which is more conservative than some of the peers' due to concerns over potential earnings disappointments from potential overnight policy rate cuts, US-China trade war escalation, and policy review.

"Investors that we met in Singapore, Thailand and Hong Kong had relatively light positions in Malaysia but some indicated that they are reviewing their weighting and looking to position in some big cap stocks, in view of KLCI and ringgit's underperformance in 1H19.

"They were concerned over the poor earnings delivery of Malaysian corporates, ongoing policy reforms, and leadership succession in Malaysia," said the research house, noting that some cited lack of companies with strong earnings growth story as among the reasons why investors have favoured other emerging markets like Vietnam and Philippines over Malaysia.