KUALA LUMPUR: Malaysia's stock exchange may get stuck with a consolidation phase for a bit longer but there is a slim hope of a swift and brief rebound following the end of the US debt ceiling crisis, market observers said.
Bursa's benchmark FBM KLCI dropped to a six-month low on Wednesday after breaking its 1,390 support level before dropping further over the remaining two days of last week.
The index's 0.13 per cent dip last Friday coincided with the resolution of the debt ceiling ordeal that had gone for weeks after the White House and US congressional leaders reached a deal to increase the ceiling on May 31.
On a Friday-to-Friday basis, the FBM KLCI declined 21.72 points to end last week at 1,381.26 points from the preceding week's 1,402.98.
UCSI University Malaysia assistant professor of finance Dr Liew Chee Yoong said a swift FBM KLCI rebound was possible, albeit for a short term.
"In the long run, there is still a huge global uncertainty in the financial markets as there are expectations that the US Federal Reserve may further raise interest rates and this will most likely be followed by other countries," he told the New Straits Times.
Liew added that if this happened, central banks including Bank Negara Malaysia would face a tougher challenge to handle "economic trilemma" of maintaining price stability, economic growth and financial stability.
"If the US interest rates keep rising, financial instability will likely be looming. This economic trilemma may result in a global financial crisis sometime this year or next year. Stock markets around the world are highly correlated and Bursa Malaysia will not be spared," said Liew, who is also a fellow of Centre for Market Education.
He believes that with the current bearish investor sentiment, the FBM KLCI will continue its downward trend over the long run.
Universiti Teknologi MARA faculty of business and management senior lecturer Dr Mohamad Idham Md Razak said FBM KLCI had been on a downward trend since the start of the year.
"It is possible that the selling pressure could continue in the near term," he remarked.
Idham, however, said there were some positive factors that could support a rebound. They included the recent rally in global stocks and Malaysia's continued economic growth.
On the flipside, he highlighted a few situations that could lead the index to a protracted consolidation phase - the ongoing conflict in Ukraine that heightened the unpredictability and market volatility as well as the possibility of the Fed raising its interest rates further.
"Investors should prepare for both positive and negative swings as the index is anticipated to remain volatile in the foreseeable future," he said.
Bank Muamalat Malaysia Bhd chief economist and head of social finance Mohd Afzanizam Abdul Rashid said the decision to suspend the debt limit until Jan 1, 2024 would mean the US government might not be able to spend more to stimulate the economy.
"Combined with its restrictive monetary policy, the US gross domestic product is expected to slow further in the second half of 2023," he said.
These developments will affect Malaysia given that the country is an open economy and therefore, slower external demand may have a direct impact on key sectors such as manufacturing and services sector.
"To some degree, the upcoming state elections in the near term will also be an important event to look at. Therefore, investors are seen to be adopting a careful approach," Afzanizam added.