Choppy days could still be ahead for Malaysia equities

Choppy days could still be ahead for Malaysia equities as sentiment-driven investors react to news flows against a risky global economic backdrop. Technically speaking, with buying confidence still clearly missing, more downsides in the FBM KLCI are anticipated.

During the holiday-shortened week, the benchmark index was up 29.3-point or 2.0% in one-and-a-half day to recover parts of its recent losses. Also rebounding were the FBM 70 Index and the FBM ACE Index with a weekly increase of 2.4% and 2.6%, respectively. Daily average trading volume was unsurprisingly light at 873.3m shares valued at RM2.0b, almost similar to the 884.5m units worth RM1.9b traded in the previous week. Regional peers got a lift too from their oversold positions. Leading the pack last week were India (+6.1% week-on-week), Korea (+5.0%) and Taiwan (+4.2%). Meanwhile, key U.S. equity indices posted a weekly change of between minus 0.4% and flat.

Investors’ mood to sell rather than buy shares will persist until and unless the fundamental picture turns rosy again. Consider the corporate earnings review after the Apr – Jun quarterly results season had ended last week. With more listed companies reporting disappointing financial performances (23% within our coverage) instead of pleasant surprises (totaling just 11%) – while the balance 66% of the companies met expectations – the consequential profit growth downgrade in our earnings universe to 11% (from 18% one quarter ago) for this year would have inevitably dampened investors’ sentiment.

Up next is a reassessment of Malaysia’s economic growth prospects. We will get an update on the latest macro developments from the following line-up of data releases: (a) Bank Negara Malaysia’s interest rate decision (which may reflect the central bank’s internal opinion on the state of the economy) when its monetary policy committee meets on Thursday; (b) external trade statistics for Jul also due on Thursday; and (c) index of industrial production for Jul scheduled on Friday. On the chart, the FBM KLCI is standing now at 1,474.09, 7.7% below its 11 Jul peak of 1,597.08 and 3.6% above the recent trough of 1,423.47 (on 9 Aug). From a technical perspective, after falling in six of the last eight weeks, there is no sign yet to suggest a trend reversal is underway at this juncture. This means the benchmark index could still be on a steady slide, possibly zigzagging with a negative bias to re-test the first two support lines of 1,465 and 1,435, respectively.

Volatile as it may be, we reckon any intermittent technical rebounds in the FBM KLCI will be capped at the resistance thresholds of 1,495 (immediate) and 1,530 (next). In addition, the existence of an intermediate downward sloping trend line (see chart overleaf) could limit any short-term advancement in the benchmark index ahead.