Lead Story: Has the FBM KLCI bottomed out?

This article first appeared in Capital, The Edge Malaysia Weekly, on July 23, 2018 - July 29, 2018.
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LOCAL benchmark the FBM KLCI has been climbing since touching a 17-month low two weeks ago. Whether the rebound is sustainable will depend on the external headwinds, which have not eased the index’s strength as yet.

In April, the FBM KLCI touched an all-time high of 1,895.18 points but saw a sharp correction due to concerns over a growing trade spat between the US and China, rising US Treasury yields and a strong greenback — which impacted other emerging markets as well — and changes on the domestic political scene.

The index continued to fall in the next three months, hitting a 17-month low of 1,663.86 points on July 6, but as at last Thursday, it had rebounded 5.36% to close at 1,753.07 points.

Inter-Pacific Securities research head Pong Teng Siew says it is still too early to say whether the rally can be sustained in the weeks ahead, although he feels there is room for upside in the near term.

“A number of reasons are contributing to the recovery, one being that the selling has eased. We notice that foreign investors have turned net buyers for the first time in quite a while but this doesn’t mean they have turned net buyers for good,” he says.

Pong points out that after the local market peaked in July 2014, when both local and foreign funds were net buyers, the latter quickly switched strategy and aggressively sold down their holdings in Malaysia.

“When local funds tried to engineer a rebound, foreign funds joined in the buying, only to sell down again after a while. The index sank after that,” he says.

The FBM KLCI touched an all-time high of 1,892.65 points on July 8, 2014, but throughout the second half of the year, heavy selling pressured the index to a 20-month low of 1,673.94 points as at Dec 12.

This was partly due to a drop in crude oil prices from mid-2014. Prices fell from above US$100 per barrel to about US$30 per barrel in 2016.

The FBM KLCI continued to go downhill, dropping further to 1,574.67 points in 2015, which was one of the worst years for emerging markets in recent times.

It is not clear whether the US-China trade war could have a similar impact as plunging crude oil prices but Pong says the full impact of the dispute could be significant. “I wouldn’t go as far as to suggest that this is the bottom for the index as it could take another turn. The effects of the trade war have not been fully reflected, the full tariffs are yet to be in place and it is possible that more selling could be in store.”


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