This article first appeared in The Edge Financial Daily on November 11, 2019

KUALA LUMPUR: Is the local stock market still in the doldrums? It is certainly not judging by the performance of the FTSE Bursa Malaysia Small Cap Index, which has gained 21.44%, or 2,423.01 points, since the start of the year.

The oil and gas price rally, which has lifted many stocks in the sector substantially, is evident of keen buying interests in the battered counters (see table).

However, the benchmark FBM KLCI is in the negative zone. It has dropped 4.78% or 80.85 points, year-to-date. The benchmark is among a handful in the region trading below last year’s closing so far this year.

Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng concurred that foreign selling caused the selldown in the local benchmark.

“I think many countries will benefit from foreign funds inflow. The KLCI is the exception due to the weak ringgit trends and politically there are still uncertainties.

“Together, corporate earnings are subdued. Almost all the big caps earnings growth is not strong, he added.

Ang said that a strengthening ringgit would be a catalyst to attract foreign investors to return to Malaysia.

That said, the benchmark index is seen to recover after hitting its multiple-year low at 1,551.23 last month — the lowest level since August 2015.

“The market has bottomed out and we anticipate it is time that the index breaks out of the downtrend that we have seen thus far,” said Rakuten Trade Research vice-president Vincent Lau.

Lau expects the local benchmark to recover further on the back of higher crude palm oil (CPO) prices and the resumption of government projects like Bandar Malaysia and the Johor Baru-Singapore Rapid Transit System.

EquitiesTracker head of research Lim Tze Cheng concurred that the KLCI is seeing light at the end of the tunnel going forward as the revival of these infrastructural projects will boost the construction sector, which will in turn create spillover effects on the local economy.

Additionally, the results of the restructuring exercises on infrastructure projects undetaken by the government-linked companies undertaken the new government, Lim said, should be reflected in better corporate earnings soon.

Despite the recent rebound seen in the KLCI, Fundsupermart research analyst Jerry Lee Chee Yeong is cautious about the outlook for the local benchmark, as the global and local developments will continue to weigh on the performance of the index.

However, Lee sees no risk that could pull the KLCI down below 1,500 points at this junction.

“The sustainability of the recent rebound will be very much depend on on the global macro environment as well as the US-China trade negotiation.

“We are a bit cautious on the outlook for the KLCI as the index’s constituents are basically the traditional stocks (banks, plantations, telecommunications and energy), and their outlook is not really encouraging.

Bank Negara Malaysia last Friday reduced the statutory reserve requirement to 3% from 3.5% effective Nov 16. The last time  it did it was in February 2016 when the rate was cut to 3.5% from 4%.

The move is seen to benefit the banks in the form of lower cost of funding.

From the technical charts, EquitiesTracker Holdings Bhd’s chief market strategist Benny Lee said it is likely that there will be a technical rebound towards year-end, where 1,640 points will probably be the ceiling.

“Beyond that, it will be difficult to climb back up to the level seen at the beginning of the year,” he noted.

In terms of sector, both EquitiesTracker’s Lee and Rakuten Trade Research’s Lau hold positive views on the plantation sector given the recovery in the CPO prices that will boost earnings.

In addition, Lau views that the construction sector should begin to catch up, particularly as new mega projects come on stream.

The technology sector is another sector that is expected to outperform.

“I like the technology sector as it is driven by global development rather than local challenges,” adding that the driver for semi-conductor is higher demand for 5G, automotive and smart devices, EquitiesTracker’s Lim noted.