KUALA LUMPUR: The risk premium of the global market, including Malaysia, will rise if the Israel-Hamas war escalates and evolves into a full-scale proxy war between certain countries.
Global stock, bond and commodity markets have already reacted forcefully to the attack on Israel by the Palestinian militant group Hamas over the weekend, analysts said.
Stock markets across the Middle Eastern region were in a sea of red with Israel's benchmark index Tel Aviv Stock Exchange 35 plunging seven per cent.
The Dow Jones Industrial Average and Nasdaq are poised to open on Monday at about 0.6 per cent to 0.7 per cent loss respectively based on their live futures prices.
Kenanga Reseach noted that Brent crude oil futures prices have jumped more than four per cent to US$88 per barrel while the flight to safety has seen US 10-year Treasury yield easing 7.0 basis points to 4.72 per cent.
Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid said the latest event could lead to further volatility if it is prolonged, although its risk factors are hard to quantify now.
"Immediately, it might have an impact on crude oil prices given the proximity of the conflict area and the oil-producing countries. So this will give rise to a possible increase in inflation rate and how the major central banks would respond to it, especially the US Federal Reserve," he told Business Times.
The ringgit could also remain weak in light of the "risk-off mode".
"So in the near term, market participants will observe how the tension would evolve, especially the response from the G7 countries. It seems that the event will result in unsettling market sentiment," Afzanizam added.
Kenanga Research said while Israel and Palestine are not key producers of oil and other key commodities, they are basically at the doorstep of Middle East, which is a major oil producing region in the world.
The firm feels that an escalation of the war could eventually disrupt the production or transportation of oil out of the region.
"In any case, the perception of a heightened geo-political tension itself is sufficient to keep oil prices high, adding inflationary pressure to the global economy."
For now, Kenanga Research maintained its FBM KLCI's earnings forecasts and end-2023 target of 1,520 pts as the war is still a developing situation.
"Assuming we cut our target price-earnings (PER) for FBM KLCI by 0.5 times to 16 times (from 16.5 times we currently apply), our year-end target will fall to 1,470 points (from 1,520 points currently).
"If we were to cut our target PER by a full multiple, our end-FBM KLCI target would fall to 1,425 pts.
Kenanga Research has picked banks for proxy to a healthier economy over the long term with stronger fiscal sustainability backed by targeted fuel subsidy, and to a certain extent, proxy to multiplier effect throughout the economy with the rollout of mega public infrastructure projects.
"We are now even more upbeat on contractors given the impending rollout of mega projects such as Mass Rapid Transit 3, Bayan Lepas Light Rail trasnit and various large-scale flood mitigation projects.
"We like telcos given their earnings resilience against targeted fuel subsidy with telecommunications services having evolved into a basic necessity of modern life."
The firm is cautious on mid-market retailers and automotive makers/distributors as a higher fuel bill will eat into disposable incomes of their target customers such as the M40 group, on the assumption that part of the M40 group will be cut off from fuel subsidy.