Against a flat 2016, the recent uptrend on the KL stock market was a minor relief but will it sustain after Chinese New Year?
“Yes, it is likely to continue but retail participation may be lukewarm. Liquidity has improved but is hardly abundant,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.
Deposits in the banking system only grew 2.2% year-on-year in November 2016, Pong noted. “It is still possible for continued uptrend but my conviction is that the KL Composite Index (KLCI) will move higher up to April or 1,740 points, whichever comes first.”
“If it does hit that target next month, it can run up to 1,800 points. We see a potential selldown in May or June,’’ said Chris Eng, head of research, Etiqa Insurance & Takaful.
“The market will likely peak at the 1,750-1,800-point level in the first half before easing back to the 1,730 level at the end of the year, as investors refocus on Malaysia’s fuzzy long-term economic and corporate earnings trend,’’ said Vincent Khoo, head of research, UOB Kayhian.
Is it just a rebound? “Unless a strong recovery in earnings comes along, the current uptrend is just a recovery from the selldown last year,’’ said Danny Wong, CEO, Areca Capital.
By the middle of this year, it may not be so good as risks from European elections and US policies come to the fore. In fact, some analysts cite concerns on the market outlook on possibly uninspiring fourth quarter earnings, bottoming of the global interest rates cycle and Trump-induced volatility.
Overall, this year is likely to be better than 2016. “Current buying may continue,’’ said an analyst, citing catalysts such as the cheap ringgit, low foreign holdings and a low base from 2016.
Besides, earnings which have not grown for three years, may be set to rebound. “Plantation earnings are expected to rebound while banks are holding up,’’ said Bernard Ching, head of research, AllianceDBS Research.
Genting Plantations and TSH Resources are among the favoured planters for maturing acreages. When it comes to talk of trade wars, some are bracing for a potentially fierce one between the US and China as well as potentially some other countries.
How nasty can it get and how may the rest of the world be impacted? “It is possible that it could get nasty although cooler heads can prevail. Asean members sell 10% to 13% of their exports to China; if a trade war does break out, that could come down as the US hits China with import duties,’’ said Eng.
Inflation and global recession are high on the danger list with trade wars and border taxes. “A bruising trade war with China will likely stoke a potentially massive bout of inflation which may kill growth as interest rates will have to be raised in response, something that a heavily indebted world cannot work with,’’ said Pong, adding that inflation is already making its strongest comeback since the 1980s.
Prices will rise while incomes fall. “Prices of goods in reserve currency economies will spike. Currencies in export-dependent economies will slump along with demand for their goods.
“Amidst the resultant slowdown in consumption everywhere, prices will be rising in response to trade barriers and retaliatory measures. Domestic stimulus may work for a while.
“Such stimulus amidst lower exports will weaken the currencies of export dependent economies. Incomes in domestic currencies will rise, so will their imports, resulting in a weakening of the external trade balance.
“Over time, that local currency will weaken, negating the rise in purchasing power of people in that stimulus dependent country,’’ said Pong.
Global trade will be affected by trade wars. “It will have a knock-on effect on those countries that have deep intra and inter-trade with China and the US, not only via direct trade channels but also indirectly along the production supply chain.
“There may be opportunities for countries in direct competition with China in the US market, such as South Korea, Japan, Taiwan and Vietnam but the integrated global chain will ultimately, to some extent, impact these countries,’’ said Lee Heng Guie, executive director, Socio Economic Research Centre.
Currency devaluation cannot be ruled out. “This is a possibility. Although China is in transition from external dependence to internal consumption, it remains manufacturing centric. Hence, a reasonable level of yuan is needed to support its trade.
“A weaker yuan means struggling Asian exporters and this does not augur well for Asian economies, some of which are already facing domestic headwinds.
“The US also needs strong Asian economies for its trade to flourish. This is especially true at a time when the strong greenback has, to some extent, taken a toll on US exports,’’ said Nor Zahidi Alias, chief economist, Malaysian Rating Corp.
Trade wars lead to currency wars that increase uncertainty, give rise to other economic problems and erode business confidence.
Columnist Yap Leng Kuen quotes from ‘Mending Wall’ by Robert Frost: ‘Good fences make good neighbours.’
