Technically speaking, a reversal of market trend could be underway now

From a technical perspective, the odds are that our Malaysian bourse will extend its downtrend going forward. The benchmark FTSE Bursa Malaysia KLCI or FBM KLCI could sink deeper, probably bottoming somewhere between 1,185 and 1,240. This represents an additional downside risk of 11%-15% from the current level.

3Q11 was a washout for global equities. In Malaysia, the bellwether slumped 12.2% during the quarter, which more than wiped out its first half’s gains to push the year-to-date performance into the red (minus 8.7% since end-10). Among the regional peers, the hardest hit were: (a) China shares listed in Hong Kong (-29.7% so far this year / -29.1% in 3Q11); (b) Hong Kong (-23.6% / -21.5%); and (c) India (-19.8% / -12.7%) while the out-performers were (a) Indonesia (minus 4.2% year-to-date / -8.7% in 3Q11); (b) Philippines (-4.8% / -6.8%); and (c) Thailand (-11.3% / -12.0%). On Wall Street, major U.S. stock indices registered negative year-to-date returns of 5.7% to 10.0% (following declines of between 12.1% and 14.3% in 3Q11).

A confluence of adverse developments has effectively forced our market rally to come to a halt. Taking a hit on sentiment is a list of fear factors comprising: (a) rising risk aversion, which has sparked liquidity outflows from Asia; (b) sovereign debt crisis fallouts in Europe; (c) double-dip global recession risk; and (d) a streak of corporate profit downgrades. Caught in a self-perpetuating process, we may be stuck in a vicious circle now following the unrelenting bashing of confidence, which could knock on the already fragile economic conditions.

There is no easy way out to resolve the overseas financial troubles because of limited flexibility in both the monetary (interest rates are already at low levels) and fiscal (due to budget deficits constraint) policies. The possibilities of a credit crunch and instability in the currency markets could complicate the situation even more. To cushion the external threats, Malaysia will be relying on domestic forces such as: (a) the progressive implementation of high-impact infrastructure projects (e.g. MRT) under the government’s Economic Transformation Programme (ETP); and (b) the tabling of 2012 Budget on 7 Oct to shore up our local economic resilience.

But to be clear, Malaysia equities will still be subject to external market volatilities given the presence of a fairly large sum of foreign money in the country. Latest statistics provided by the stock exchange showed foreign ownership – as a percentage of overall market capitalization – at 22.0% as of end-Jun this year, versus 20.8% in end-Feb 09. But in terms of absolute value, this translates to an estimated amount of RM290b (just before the market peak in early Jul this year), which was more than doubled the corresponding level of RM134b (prior to the start of our local bourse run-up in mid-Mar 09), thus making us vulnerable to further foreign selling.

A potential wild card is the country’s 13th general elections, which must be held by Apr 2013. As the polling day gets nearer, depending on whether there will be any political hangovers, the blowing of pre- and post election winds could either boost or depress our stock market performance from a political risk angle.

Technically speaking, a reversal of market trend could be underway now. We believe the rally on our local bourse would have run its course already, climbing from a low of 836.51 in mid-Mar 09 to reach a top of 1,597.08 in early Jul this year for a cumulative gain of 760.6-point or 90.9% over 28 months. This means our initial technical projection made early this year for the FBM KLCI to peak between 1,730 and 1,780 no longer holds.

Report from HWangDBS