By Benny Lee / The Edge Financial Daily | December 30, 2015 : 10:09 AM MYT
This article first appeared in The Edge Financial Daily, on December 30, 2015.
The FBM KLCI closed at 1,761 points at the end of last year and if it closes below this level tomorrow, we are going to have two consecutive years of declines after five years of advances. The index is currently at the level at the end of 2012. In other words, the decline in the past two years (2014 and 2015) has wiped out gains made in 2013. To date, the FBM KLCI is down 4.3% at 1,685.4 points.
The market was also volatile as the index traded in a huge range of between 1,504 and 1,867 points. That’s a 20% range from top to bottom. The volatility was caused by the bearish and bullish factors below.
The bearish factors
One of the bearish factors that contributed to the decline was the weak ringgit, which depreciated 23% from 3.50 to a US dollar at the end of last year to 4.30 yesterday. Another bearish factor was declining crude oil prices. After plunging 48% in 2014, the price has fallen another 36% since the end of last year. Therefore, oil prices have fallen 67% in two years. The ringgit has depreciated 30% in two years.
The banking sector also took a hit as economic activity slowed down, especially in the property sector. Furthermore, a series of interest rate hikes also discouraged the bulls. Lastly, the market is also being cautious about the rising cost of living that could lower consumer spending (and investment) power.
The supporting bullish factors
There are always opportunities in any crisis. Low commodity prices and the weak ringgit boost sectors that derive their income in foreign-dominated currencies, especially the US dollar. We have seen share prices of export-oriented companies like furniture and electronics makers climbing to multi-year highs. Rubber product makers (which benefited from the strong US dollar and also very low rubber prices) like glove, hose and condom makers benefited the most as we have seen their share prices climbing to historical highs.
The low ringgit could also be an attractive proposition for foreign investors. Although this may not directly affect the share market, the Malaysian economy should benefit if the government is able to play the right cards to attract foreign investors as we are in the final stages of moving towards a developed nation.
The national income was boosted by the goods and services tax (GST) imposed this year and the removal of fuel subsidies. The GST and removal of subsidies have burdened the people, who did not see a good relative increase in their income.
The signing of the Trans-Pacific Partnership agreement is one of the first steps for Malaysia to open up more foreign trade partnerships. We have also seen significant investments coming into Malaysia, especially from China.
In terms of the FBM KLCI’s performance against the regional market year to date, Malaysia was quite defensive in a mixed market.
From the table above, only European and China markets have extended their bullish run. Malaysia’s FBM KLCI performance was not as bearish as some other markets in the region like Jakarta, Singapore and Thailand.
What to expect next year
Moving forward, we expect oil prices to remain low for some time after the United States lifted the ban on exporting crude oil. We could see shale oil from the US flooding the market, which is already facing a glut. Therefore, the ringgit is probably going to stay low as well as I do not see it falling below 4.00 against the US dollar in the short term.
The weak ringgit may still provide good returns for export-oriented companies. Rubber product makers may continue to see growth as natural rubber prices may continue to stay low because of low crude oil prices (natural rubber replacement is synthetic rubber, which is derived from crude oil).
The property sector may still be supported by foreign investments, especially from China. We have seen huge property developments from China in Johor and Melaka. Local companies may feel the pressure of competing, but developers can always work with these foreign companies. Construction companies (that are able to work with foreign companies) may benefit from the developments.
One of the sectors that may provide support for the market is the plantation sector, especially palm oil. Palm oil prices have been low for the past two years and the trend is beginning to change as the yearly average price is starting to increase. The TPP and the joint council between Malaysia and Indonesia could provide the bullish support.
Other sectors that could benefit from these developments are those in the infrastructure industry. The telecommunications, transportation and energy sectors may benefit, probably in the second half of the year.
The market is expected to continue to be volatile the coming year as it will be affected by the bullish and bearish factors. However, the bias is towards the bearish side because if we do not get enough foreign investments, there won’t be any bullish factors except from US dollar-derived businesses.
As for the FBM KLCI, the trend is still bearish in the long term as it stays below the 200-day moving average. If the FBM KLCI fails to climb above 1,740 points, it means that there is still not enough strength to turn the trend bullish.
For the beginning of 2016, expect a pullback in the FBM KLCI in the first two weeks as in the previous years as a result of a correction from the year-end window dressing.
An important factor to take note of this year is interest rates. The US has already started the ball rolling in December by raising rates for the first time since 2006. If liquidity is being diminished, there could be a major correction in the global markets as they have been supported by massive liquidity since 2009 and this liquidity comes from debt. Debt has to be paid.
It is definitely going to be an interesting year in 2016 in terms of the economy, financial markets, society and politics. Nevertheless, I wish all of you good health and blessings for the new year. Happy New Year!
Benny Lee is chief market strategist for Jupiter Securities Sdn Bhd. Jupiter Securities is a participating broker in Bursa Malaysia. He can be contacted at email@example.com. The above commentary is solely for educational purposes and is the contributor’s point of view using technical analysis. The commentary should not be construed as an investment advice or any form of recommendation. Should you need investment advice, please consult a licensed investment adviser.