SYNOPSIS

• Global markets endured significant volatility in 3Q2015 with sentiments roiled by the combination of uncertainties over the U.S. interest rate direction and sliding commodity prices that also led to Emerging Market currencies taking a beating. At the same time, the dour economic environment also sapped investor confidence causing most global markets taking a big step backward. The Malaysian stockmarket was no different amid the weakening Ringgit, lower corporate earnings and heightened political uncertainties. However, it managed to outperform its regional peers as domestic support emerged after the spate of hefty foreign selling.
• Global economic growth remained tepid in 2Q2015 with many economies posting weaker-to-little growth, attributable to the sharp decline in commodity prices, uncertain U.S interest rates direction and the sustained low fuel prices that resulted in many countries, particularly Emerging Market economies, to suffer a severe slide in their exports and currencies.
• The above factors will continue to dampen economic growth ahead with the global GDP growth revised to 3.0% Y.o.Y (from 3.2% Y.o.Y) for 2015. The impending U.S. interest rate hike could also sap fresh growth impetus and countries with strong dependence on commodities could continue enduring low growth rates and/or contractions as prices are not expected to post strong recoveries amid the weak global growth outlook that is also sapping demand.
• Although Malaysia’s 2Q2015 GDP was a tad higher than expected, the outlook remains dour with the effects of the GST implementation likely to prolong and the slower external sector will continue to have an adverse impact the country’s growth prospects. However, there remains no change to 2015’s GDP forecast at 4.5%-5.5% Y.o.Y, albeit the consensus GDP growth rate has been reduced to 4.8% Y.o.Y for 2016 as the challenging economic environment is expected to persist.
• We believe the immediate global market outlook will remain volatile and unsettled given the continuing uncertainties over the direction of U.S. interest rates and more particularly, the prevailing slow global economic growth that will continue to hurt corporate earnings growth and the corresponding equity valuations. We also expect the market’s volatility to be accompanied by the continuing downside bias on most global stock indices as we expect the flight to safety strategy could prevail for longer.
• Conditions on Bursa Malaysia are also likely to stay volatile and susceptible to further selling over the medium term as the country and economy continues to grapple the combination of the weaker Ringgit, insipid corporate earnings, the effects from the implementation of the GST, lower commodity prices and heightened political concerns. Nevertheless, the re-emergence of Valuecap could limit the FBM KLCI’s downside to the 1,580-1,600 points level as most of the foreign selling may have already dissipated and this will lend further support to the market, in our view.
• On the upside, we think the 1,750-1,780 levels would serve as a big hurdle given that Bursa Malaysia stocks remains fairly valued as the FBM KLCI’s PERs is already at 16.6x and 15.3x respectively for 2015 and 2016, which is within its historical average. Hence, we re-iterate our defensive strategy and preference for construction stocks amid the continuing infrastructure development as well as for high dividend paying stocks to hedge against the still difficult market environment.

MARKET REVIEW 3Q2015

• As most investors on Wall Street were chasing higher yields in the technology sector, some were circumspect over the possible shift in the Federal Reserve’s monetary policy stance by switching their portfolio orientation towards defensive sectors like consumer discretionary and healthcare, which dominated most of the trading activities in 1H2015.
• However, the heightened uncertainty in the interest rate direction, emerging market currency volatility and weakening global economic growth prospects has left many market participants scrambling to the sidelines over the 3Q2015 period. Consequently, the global equity markets were turned into a bandwagon of teeter-totter that comes with sharp gyration as the MSCI World Index tumbled 9.9% Q.o.Q, while all of the U.S. benchmark indices dipped by percentages similar to levels last seen in 2010.
• Amidst the turmoil, it has given some leeway for other asset classes like gold and treasuries to rise again as safe havens given the latter’s security and potential beneficiary to the hike in interest rate. Meanwhile, the U.S. Dollar Index rose 6.6% YTD against the six other major currencies owing to the brightening unemployment numbers and gradual recovery in the U.S. economy.
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• European stockmarkets shared the same fate as well, albeit the credit extension given to Greece to escape the looming “Grexit”, which send shudders to the Eurozone region over the earlier part of 2015, calmed markets slightly. On a Q.o.Q basis, the FTSE (resources heavy) and DAX (export reliant) indices all endured sharp losses, given the higher commodities and export-related exposure of their respective index weightings. Although the CAC also registered a 7.0% Q.o.Q decline, it managed to buck the negative broader market performance on a YTD basis (+4.3%).
• Meanwhile, the extreme volatility emanating from the correction ensued over on Shanghai Composite Index has persuaded its financial authorities to intervene via various market stabilising mechanisms, but the intervention failed to lend any meaningful support owing to the overstretched valuations. Although some of the losses were pared down by the surprise devaluation of the RMB, this, however, has brought the Hang Seng Index to register a double digit YTD losses (-11.7%) as the country struggles with the high cost of its currency peg and faces little flexibility in manoeuvring its financial monetary tools.
• Concurrently, the shift in sentiment also pushed the Nikkei to return back most of its YTD gains, whilst sending other major indices lower – the ASX All Ordinaries (-7.2% Q.o.Q , Kospi (-5.4% Q.o.Q), Sand Taiex (-12.2% Q.o.Q) all closed lower.
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• Despite the significant underperformance of the Ringgit, the FBM KLCI only registered a YTD loss of 8.0% YTD vs. Jakarta Composite Index (-19.2% YTD) and FTSE Straits Times (-17.1% YTD), while only the Stock of Exchange Thailand managed to register lower losses as the main index only fell by 9.9% YTD. Much of the FBM KLCI’s outperformance against the regional peers was due to the re-emergence of domestic funds in supporting selected index heavyweights as the foreign selling abated towards the end of 3Q2015. The revival of Valuecap, with its RM20 bln fund also helped to calm the local stockmarket conditions.
• As most of the quarterly losses were skewed towards changes in crude oil prices and palm oil prices, the commodities-related index-linked heavyweights like SapuraKencana Petroleum and Sime Darby were amongst the biggest losers on the FBM KLCI. There were, however, some reprieve seen in other heavyweights like IHH Healthcare and MISC as the largest hospital operator in Asia embarked on an acquisition activity in Turkey, while the shipping giant intends to dispose of its entire 50.0% stake in VTTI BV to focus on its core business of oil and gas transportation.
• Simultaneously, plantation and trading/services counters, especially the oil and gas players were dragged alongside with the construction, property and finance sub-sectors as the dwindling international reserves, lower export revenue (owing to the drop in commodities prices) and Malaysia’s high household debt level vs. other peers in the South East Asia region have painted a dimmer prospects and outlook for many of the economic agents.
• Meanwhile, the lower liners also were not spared from the broader market selloff amid the weakening in market sentiment/bullishness, which concurrently increases retailer’s defensiveness (or turning risk averse), whilst reducing their buying participation rate and increasing the frequency of their profit taking activities.
• However, it was not all gloom and doom as investors flocked to export related industries like furniture players, plastic manufacturers and medical gloves/rubber related exporters to benefit from the lower cost of materials (as prices of commodities declined) and reaping the foreign exchange gains as most of the exporters revenue were denominated in U.S. Dollar, whilst their costs were sourced locally.
• Consequently, the Technology and Consumer Sector was the only sub-indices outperformers YTD that reaffirms the defensiveness of its constituents vs. the mostly negative broader market performances, while the sole outperformer for 3Q2015 was the Industrial sector that eked-out a 1.1% gain.
• Also, technology related companies like semiconductors or electronics manufacturer with significant export market exposure also outperformed the FBM KLCI. On the contrary, the Finance and Property sub-indices remained the major laggard with negative double digit YTD performances as their prospects dimmed with and lower earnings performance nad fewer property sales respectively.
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Source: M+ Online Research - 30 Oct 2015