Inversion therapy

• Foreign outflow trumped the market. The KLCI tested its lowest level for the year but recovered to close just a shade below 1,600. Similar to the previous week‘s trend, which saw a net foreign outflow of RM1.0bn, selling from foreign funds continued at a hefty RM600m during the week (Table 3). The market has now suffered a net foreign outflow for 10 straight days dating back to 2 Aug, the worst run since mid-May that saw 14 consecutive days of net foreign selling.

• Wall of worry on growth as yields invert. Global stocks suffered huge falls on Wednesday, recording one of the worst daily declines of 2019. The S&P 500 fell by 3% and US stocks are currently 5% below their record level set in late July. The rout was triggered by a plunge in US longterm yields, as the 10-year US treasury rate fell below the 2-year rate, hence creating an inversion. A US yield inversion is usually associated with a recession occurring. Also, Argentina’s equity market fell by 48% in USD terms as investors reacted negatively to its election results.

• Malaysia’s 2Q GDP of 4.9% stands out amid economic gloom. In contrast to the slowdown seen in the region and advanced economies, Malaysia's GDP growth accelerated to 4.9% yoy in 2Q19 from 4.5% in 1Q19. Stronger growth in 2Q19 was driven by higher household spending and private investment whilst all economic sectors expanded, with the mining sector registering its first positive growth since 3Q17. Private consumption remained the key driver whilst on the supply side, the mining sector rebounded, driven mainly by the recovery in natural gas output.

• Earnings for 2019 may see downward adjustment. The KLCI is now down 5.4% YTD, while the FBM Emas has turned negative at -1.9% YTD as banks experienced hefty decline in their share prices last week. Maybank, CIMB, Public and HLB are all down by >10% for the year. Despite the better GDP expansion for 2Q, we do not think this will provide relief to the market as KLCI earnings and GDP have a weak correlation. In fact, we may see the KLCI’s aggregate earnings for 2019 adjusted slightly downward post-August. We think the adjustments could emanate from banks, as well as from plantation companies and Pet Chemicals (which announced their earnings last week).

Source: BIMB Securities Research - 19 Aug 2019