No change in forecasts for FBM KLCI despite public debt concerns

This article first appeared in Capital, The Edge Malaysia Weekly, on May 28, 2018 - June 03, 2018.
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THE bears swarmed the local stock market after the new government revealed that the country’s national debt had exceeded RM1 trillion. The FBM KLCI sank below 1,800 points for the first time this year since breaching the level in early January.

Uncertainties about new policies and the government’s measures to replenish the nation’s coffers added to investor concerns.

Even the current results season has not been able to grab investors’ attention.

The Pakatan Harapan government has pledged to carry out several reforms in its first 100 days, including replacing the Goods and Services Tax with the Sales and Services Tax (SST), the gradual abolition of tolls and a review of subsidies, putting a big question mark over the country’s fiscal position going forward.

After hitting an all-time high of 1,895.18 points on April 19, the benchmark index fell about 6% to a six-month low of 1,775.66 points on May 24, eradicating all gains made since the start of the year.

Nonetheless, after declining for four consecutive days, it bounced back last Friday to close 21.74 points or 1.2% higher at 1,797.4 points. Week on week, the FBM KLCI shed 3% or 57.1 points.

Inter-Pacific Securities research head Pong Teng Siew says the Ministry of Finance’s (MoF) announcement of the government’s RM1 trillion liabilities contributed to the outflow of funds, driving the benchmark index down.

Last week, Finance Minister Lim Guan Eng revealed that the government’s liabilities as at Dec 31, 2017, totalled RM1.087 trillion or 80.3% of gross domestic product.

This comprises the federal government’s debt of RM686.8 billion, government guarantees of RM199.1 billion and lease payments for public-private partnership (PPP) projects of RM201.4 billion.

Lim also said the ministry will soon make an announcement on whether or not Malaysia can meet its budget deficit target of 2.8% of GDP.

“The FBM KLCI dropped as foreign funds exited the market after the news. But the unexpected outcome of the election and the debt issue were only partly responsible for the outflow. Also responsible were external developments that affected sentiment on emerging markets,” says Pong.

Among factors that pressured Asian equities were the US government’s national security probe into car imports, which could lead to new tariffs, trade talks between the US and China as well as the cancellation of the US-North Korea summit.

Asian market performance was mixed last week, with Japan’s Nikkei 225 and Hong Kong’s Hang Seng Index falling 2.1% and 1.5% week on week respectively, while South Korea’s Kospi was flat. Closer to home, the Jakarta Composite Index rose 3.3% week on week, while Singapore’s Straits Times Index fell 0.5%.

According to Pong, foreign funds started flowing out of Bursa Malaysia in early May and the volume picked up as the election neared. However, he believes the outflow will ease after a while and that local funds will step in.

Local equities were sold down in the week ended May 18 as foreign investors dumped RM2.48 billion worth of shares, the biggest selloff since the week of Aug 23 in 2013, according to MIDF Research’s latest fund flow report.

The selldown reduced cumulative inflows from RM2.52 billion prior to GE14 to RM40.2 million as at May 18.

The ringgit had also weakened to 3.985 against the US dollar at the time of writing from around 3.85 to 3.90 in early April.

Despite these events, Pong is maintaining his year-end target for the FBM KLCI at 1,900 points and is not changing his forecast for the local market for the year. However, he does not expect the index to hit new highs anytime soon.

Public Investment Bank is also not changing its year-end target of 1,860 points for the FBM KLCI, and believes that the local market will remain steady for the rest of the year.

“Market conditions will remain encouraging, underpinned by steady global growth and earnings, and we still hold the view that significant market weakness should be seen as an opportunity to accumulate, although the recent slump is still not compelling,” says the research house.

However, it says there will likely be short-term pain in the form of slower GDP growth due to the re-prioritising of investments, and loss of revenue from such measures as the removal of GST and abolition of tolls.

MIDF Research analyst Adam M Rahim tells The Edge that foreign funds sold Malaysian equities worth about RM812 million from last Monday to Thursday, extending the selling streak to 14 consecutive days.

“Foreign investors withdrew about RM4.5 billion from local equities during the 14 days of selling, wiping out the RM5.2 billion inflow recorded from early this year until before GE14,” he says.

Adam expects foreign selling to continue for the rest of the year, amid intermittent buying. He compares the current situation with that of GE13, when foreign funds turned net sellers for 24 out of the 34 remaining weeks in 2013. This was despite the funds buying about RM1.43 billion of Malaysian stocks a day after the election, he adds.

“As foreign investors tend to mop up equities prior to an election, the next target for them to accumulate shares in the region is either Thailand or Indonesia, which are expected to hold their elections in February 2019 and April 2019 respectively,” he says.

On the other hand, he adds, net inflow could pick up going forward, driven by the positive impact of policies on government revenue, favourable external developments, including the trade talks between the US and China as well as between the US and North Korea.

FXTM global head of currency strategy and market research Jameel Ahmad says external developments will determine the direction of the ringgit, especially since US President Donald Trump has called off a summit with North Korea.

“If investors adopt a more cautious stance in the coming trading sessions, there is likely going to be less buying of emerging market assets, which could impact the ringgit. The local currency, like several other emerging market currencies in the region, was trading lower against the US dollar on Friday,” he says.

He also notes a shift in market sentiment following the US announcement, with traders becoming a bit more risk-averse and encouraged to seek the yen and gold as safe haven assets.


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