THE FTSE Bursa Malaysia KLCI (FBM KLCI) suffered a steep correction to a fresh 12-month low last week, propelled by sell-off in global equities, that was driven by global economic weakness, plunging oil prices and potential outbreak of the Ebola virus in the United States.
Market sentiment was also rattled by data from Europe that showed consumer prices in Sweden and Spain fell. The United Kingdom inflation slowed to a five-year low and a measure of German investor confidence decreased for a 10th month.
Meanwhile, investors were also concerned over the effect of a stronger dollar on global demand and US earnings.
For the week, the blue-chip benchmark FBM KLCI lost 20.57 points, or 1.14 per cent, to 1,788.31, with losses on CIMB (-26 sen), IOI Corp (-19 sen), Sapura Kencana (-18 sen) and Genting Bhd (-30 sen) accounting for most of the losses.
A rebound in crude oil prices mitigated the downbeat sentiment on the local equity market last week as investors returned last Friday to nibble on some badly beaten blue chips and oil and gas stocks.
The strong pullback emboldened hopes for a continued revival this week and could be supported by a similar recovery on Wall Street last Friday.
While it is understood that last week’s correction was driven by external factors, it is noteworthy to point that fundamentally nothing has changed externally to warrant a change in mood when the index rebounded.
As the market is driven by expectations, in the absence of positive news flows, the reversal in trend is not expected to be as swift as the correction and the revival can stall if nothing solid comes by.
Investors are still anticipating that the European Central Bank will announce €1 trillion (RM4.2 trillion) quantitative easing soon to mitigate the deflationary impact and to counter recessionary pressures.
On the other hand, members of the Organisation of Petroleum Exporting Countries have not made any decision to meet ahead of the scheduled November 27 meeting to discuss production cuts.
In view of the still ample liquidity in the local scene and the absence of any serious capital flight, this column is of the view that the FBM KLCI will recover to undergo the usual fourth quarter rally.
Although the recent correction has not neutralised the benchmark index’s lofty valuations totally, it has reduced it to a CY15 PER of 14.9 times or a slight premium of four per cent against its closest neighbours (Singapore, Thailand, Indonesia and the Philippines) versus an average 10 per cent between 2008 and last month.
There could be a net foreign inflow situation in the fourth quarter as foreigners take cognisance of the government’s effort to reign in budget deficits while promoting economic growth by targeting specific high value- added activities.
Investors should buy on weakness fundamentally solid high beta stocks in the domestic sectors that will benefit from Economic Transformation Programme (ETP)- related initiatives and improved external demand, especially with disposable income rising.
While neutral on property, there are pockets of opportunities for developers like Huayang and Sentoria that cater for the affordable segment. Mah Sing has sizeable projects along the growth corridors that will benefit from the ETP.
Ebola fears could create demand for undervalued players in the health-related sectors, like KPJ, Supermax and Karex.
Technical outlook
The local market slumped on Monday, tracking regional market losses as strong Chinese data failed to soothe worries on sluggish global growth.
The FBM KLCI lost 11.68 points to settle at the day’s low of 1,797.20, off an early high of 1,808.95, as losers swarmed gainers 757 to 155 on weaker turnover of 1.74 billion shares worth RM1.80 billion.
The FBM KLCI was stuck in range-bound trade the following day due to lack of local leads, in tandem with key regional markets as heightened concerns about the health of the world economy and Ebola virus unnerved investors.
The FBM KLCI inched down 0.82 points to close at 1,796.38, off a high of 1,801.81 and low of 1,790.99, as losers edged gainers 652 to 226 on a turnover of 2.21 billion shares worth RM2.45 billion.
Stocks closed lower on Wednesday, on the back of subdued demand due to lack of catalysts to drive trading, ignoring the regional rebound as signs of low inflation in China fuelled hopes of more easing measures to help the domestic economy.
The FBM KLCI dropped 9.54 points to close at 1,798.84, off a high of 1,801.12 and low of 1,786.78, as losers led gainers 659 to 209, on steady turnover of 2.04 billion shares worth RM2.16 billion.
Bursa Malaysia shares suffered steep falls the next day as most heavyweight stocks came under selling pressure following the extended selloff in key regional markets as the “Perfect Storm” on Wall Street weakened investor sentiment.
The FBM KLCI lost 19.07 points to close at day’s low of 1,767.77, off a high of 1,784.84, as losers thrashed gainers 1,001 to 64 on trade totalling 2.55 billion shares worth RM2.67 billion.
Stocks staged a rebound on the final trading day of the week, as higher crude oil prices prompted investors to accumulate oil and gas and plantations shares, while key regional indices closed mixed amid choppy trade as investor fears over slowing global growth trumped relief over better economic data from the US.
The FBM KLCI recouped 20.54 points to close at 1,788.31, off a high of 1,795.29 and low of 1,766.22, as gainers led losers 884 to 128 on trade totalling 2.29 billion shares worth RM2.48 billion.
Trading range for the local blue-chip benchmark index was 42.73 points last week, compared with the 41.38 points range the previous week, as volatility on blue chips remained high.
The FBM-Emas Index shed 199.83 points, or 1.59 per cent last week to 12,360.3.
The FBM-Small Cap Index slumped 777.95 points, or 4.49 per cent to 16,549.93, as small cap and penny stocks continued to weaken as retailers liquidated stale trading positions while most investors stayed sidelined awaiting stability to return.
The daily slow stochastic momentum indicator for the FBM KLCI has fallen into oversold zone and hooked up for an early buy signal, suggesting high probability for technical rebound gains this week.
However, the weekly indicator trigger line continued to slide further into the oversold territory.
Meanwhile, the 14-day Relative Strength Index (RSI) indicator waned into an early oversold reading at 31.54 and the 14-week RSI weakened further to a lower reading at 30.29 as of last Friday.
On trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line weakened to suggest increasing downward momentum, while the weekly MACD expanded lower to indicate further correction potential. The -DI and +DI lines on the 14-day Directional Movement Index (DMI) trend indicator also weakened, another indication of further downside bias.
Conclusion
Given the extreme oversold technical condition sparked by the selloff during the past two weeks, the FBM KLCI is ripe for an oversold rebound this week.
Nonetheless, with technical momentum and trend indicators still stuck in bearish territory, the rebound could stall on weak buying momentum.
Increasing worries over the health of the world economy and fears of the Ebola outbreak may continue to cloud investor sentiment.
The index needs to overcome the 1,800 psychological resistance level to enhance upside towards 1,840, the 76.4 per cent Fibonacci Retracement (FR) level, from the 1,896 record high of July 8.
On the downside, any breakdown below the February 4 pivot low of 1,770 will see the index extend correction towards the retracement support from 1,750, the 38.2 per cent FR, followed by stronger support from 1,716, the 23.6 per cent FR from the 1,896 record high of July 8.
The oversold technical conditions on blue chips like AmBank, Genting Bhd, Gamuda Bhd and IOI Corp should encourage investors to accumulate for recovery ahead, while construction and property lower liners such as Ahmad Zaki, Mah Sing and UEM Sunrise are also attractive.