KUALA LUMPUR: The outlook for FTSE Bursa Malaysia (FBM) KLCI is expected to be bumpy in the second half of 2022 (2H22) due to the possible recession in the United States (US) and inflationary pressures that are affecting the stock market.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said markets are contemplating the risks following the recession looming in the US.
"At the same time, higher inflationary pressures could also result in weak sentiments among consumers and businesses, which could translate into a guarded spending pattern," he told the New Straits Times.
He noted that valuations in the index have been attractive, and to some degree, a lot has been priced in by the market.
"However, the extent of uncertainties remains large as the ongoing war in Ukraine, and the Zero Covid Strategy in China are expected to significantly impact global growth and sentiments.
"It seems that staying in cash would be the best bet at the moment," he added.
MIDF Research had revised its end-2022 target for the index lower to 1,600 points from 1,680 points amid major external headwinds, including policy tightening by the US Federal Reserve.
"The aggressive monetary policy tightening by the US Fed would not derail Malaysia's macro (as well as corporate earnings) recovery but may prove detrimental to the valuation of risk assets," it said in its 2H 2022 Outlook report.
The high risks attached to earnings forecasts also play a role in the firm's reduced targets for the index.
It noted that ongoing external factors might not affect the index significantly, such as the conflict between Ukraine and Russia remaining confined within the territory of Ukraine with a manageable economic impact on the rest of the world.
The firm also stated that the Chinese authorities would continue to be proactive in handling their economic situation and pull out all the monetary and fiscal stops to avoid a broader fallout, thus limiting the risk of cross-border contagion.
"A general election, if called, may not result in negative price action post-election, and Covid-19 is a diminishing threat to society and the economy.
"With the economy and corporate earnings growth expectations remaining intact, it may seem a bit perplexing that Malaysia's (and ASEAN peers') equity markets continue to be sluggish.
"We believe that it boils down to valuation," it said.
Going forward, the firm expects the local equity market valuation to crawl higher from current levels, in line with the expectation of better earnings next year.
"However, it would remain rather depressed below its normal historical range due to the negative effect of US Fed aggressive tightening on world's financial liquidity, and higher risk attached to earnings forecasts," it added.
On the Overnight Policy Rate (OPR), the firm believes that the current focus of Bank Negara Malaysia's (BNM) monetary policy is to ensure a sustainable recovery of Malaysia's economy.
It said the central bank would raise the benchmark lending rate by 50 basis points (bps) in 2H22 following the rising core inflation trend and stronger-than-expected domestic demand.
"At this point, we expect the policy normalisation will likely be carried out in July and September Monetary Policy Committee meetings.
"However, the decision will be subject to the stability of economic growth, the pace of price increases and a further improvement in macroeconomic conditions, particularly a continued recovery in the labour market and growing domestic demand," it said.
It added that policy rate normalisation is needed to avert risks that could destabilise the future economic outlook, such as persistently high inflation and a further rise in household indebtedness.