KUALA LUMPUR: The downtrend in the stock market continued for the third straight day with the benchmark FBM KLCI yesterday slipping 1.68% or 28.28 points on selling in heavyweights amid ringgit weakness and political turmoil.

British American Tobacco (Malaysia) Bhd, Tenaga Nasional Bhd (TNB), Sime Darby Bhd, IHH Healthcare Bhd, Malayan Banking Bhd and CIMB Group Holdings Bhd stocks slipped.

The bellwether 30-share FBM KLCI hovered between 1,649.12 and 1,672.57 before settling at 1,654.37 yesterday, its lowest closing level since March 2013. It has lost 71.19 points since its closing of 1,725.56 on Aug 5.

Analysts see no catalyst for improving sentiment in the immediate term for the FBM KLCI, which has declined 6.07% year to date, as political uncertainty and weakening growth at home take hold.

The ringgit continued to slide to 3.9300 per US dollar yesterday, the weakest level since Sept 2, 1998, on worries surrounding the direction of the ringgit following Bank Negara Malaysia’s (BNM) announcement of a decline in international reserves.

Last Friday, the central bank announced that its international reserves shrank to US$96.7 billion as at July 31, down 8.34% or US$8.8 billion compared with US$105.5 billion as at June 30, the first time it has fallen below US$100 billion since August 2010.

The benchmark palm oil contract for October on the Bursa Malaysia Derivatives Exchange was also 0.64% lower at RM2,030 a tonne yesterday, as palm oil stockpiles rose 34% to 2.27 million tonnes in July 2015 from a year ago, its highest since November 2014.

Data on second quarter 2015 gross domestic product is due on Thursday, of which its growth is forecast to slow. The country’s Industrial Production Index growth slowed to 4.3% in June, down from 4.5% in May.

Inter-Pacific Securities head of research Pong Teng Siew blamed the weak performance of Malaysian stocks on the weakening ringgit, coupled with BNM’s recent announcement of falling international reserves.

But with such a significant drop, he said a rebound would usually follow as selling activity eases. Pong noted that the index may find short-term support at the 1,639 level.

“The current developments in Malaysia are unfavourable (to the market). From the looks of it, the Malaysian market is posting among the biggest drops in the region, which suggests that the FBM KLCI’s decline may be due to factors unique to Malaysia,” Pong told the DigitalEdge Daily.

“Although the FBM KLCI could stage a rebound in the near term after today’s [yesterday’s] fall, it might not be sustainable as concerns still remain,” he added.

He sees short-term trading opportunities surfacing over the next few days.

TA Securities research head Kaladher Govindan advises investors to invest in stocks in defensive sectors such as telecommunications and utilities, as these stocks provide stable returns.

“Due to the current volatile situation, investors should go for defensive stocks such as Telekom Malaysia Bhd (fundamental: 0.8; valuation: 1.1) and TNB (fundamental: 1.3; valuation: 2.4) as these stocks give stable returns,” he said.

Kaladher is maintaining a subdued outlook on the local market, due to the falling ringgit and the exit of foreign capital, noting that Malaysia’s bond market has also been impacted following the exit of foreign investors.

While Affin Hwang Capital Research analyst Kevin Low also sees a lack of catalysts ahead for the FBM KLCI in the near term, he said there is still light at the end of the tunnel as foreign investors are seen to be waiting for an opportunity to return to the local market once the dust settles.

“The FBM KLCI’s defensiveness appeared to be appealing given the volatility in North Asian markets. In terms of stock ideas, there is surprisingly a lot of interests in the small-cap space.

“Clients are already familiar with our glove and technology names such as Inari Amertron Bhd and Globetronics Technology Bhd, but our Scicom (MSC) Bhd idea seemed fresh,” said Low.

Affin Hwang has a year-end target of 1,740 for the FBM KLCI, with its top five large-cap buys being Public Bank Bhd (fundamental: 2.8; valuation: 1.8), IJM Corp Bhd (fundamental: 1.1; valuation: 0.8), DiGi.Com Bhd (fundamental: 1.35; valuation: 1.5), Gamuda Bhd (fundamental: 1.8; valuation: 2.0). and IHH Healthcare (fundamental: 1.65; valuation: 0.5).

For small- to medium-cap stocks, the research house’s picks are Top Glove Corp Bhd (fundamental: 2.5; valuation: 1.1), Aeon Credit Service (M) Bhd (fundamental: 1.4; valuation: 2.1), Pavilion Real Estate Investment Trust (fundamental: 2.8; valuation: 0.15), Inari (fundamental: 3.0; valuation: 1.5), and IJM Plantations Bhd (fundamental: 1.6; valuation: 0.8).

On the outlook for the ringgit, Pong noted that the non-deliverable forwards (NDF) market saw the ringgit trading at around the 4.00 levels against the US dollar for the two months forward contract.

“As the ringgit is being traded around 4.03 to 4.04 on the NDF market, this indicates that the market is expecting further weakness ahead,” Pong said.

Kaladher also does not expect the local currency to stabilise anytime soon, due to the political developments in the country.

“Based on the situation now, I don’t see the ringgit to be stabilising in the near term. In fact, we see room for the ringgit to further decline,” he added.

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in digitaledge Daily, on August 11, 2015.