• Stocks lower on US-China tension, retail dominate. Stocks were well below their week’s high as the Malaysian market continued to be dominated by retail investors. Key factor during the week was escalating tensions between the US and China. Domestic institutions were largely quiet, while foreign funds continued net selling of RM938m versus RM226m the previous week (Table 3). The KLCI saw greater volatility, suffering more than 50 points decline by Tuesday, before closing -1.5% for the week on weaker performance by banking stocks. The index again failed to stay positive YTD, lagging other key indices, ie FBM Emas, and FBM70.

• China watch: Economic recovery emboldened by recent data. China’s July Caixin/Markit manufacturing PMI, showed market-beating reading of 52.8 versus consensus of 51.3. The figure pointed to the third consecutive expansion in factory activity and the highest in nearly a decade. Meanwhile, July exports rose by a better-than expected 7.2% from a year earlier after a meagre 0.5% gain in June. Malaysia’s IHS Markit Malaysia Manufacturing PMI fell to 50.0 in July from 51.2 in June, but on the bright note this is the second straight month of expansion. Asian markets drew positive from the latest China data with MSCI AC Asia Pacific ex-Japan rising 1.5% week-on-week.

• Commodity prices in uptrend amid USD declines. Price of gold broke the USD2,000/oz for the first time in history, while silver rose to the highest since early-2013. Brent oil has climbed back to its March 2020 level, thrusting the S&P GS Commodity Index up by 25% from its 2020 low. Sharp rises in aluminium, soy bean oil and CPO gave credence to the commodity rally that began in earnest in April. Commodity uptrend often accompanies economic recovery post-recession periods as seen in 2008-2009 (Table 4). As countries gradually ease restrictions, rising Covid-19 infections notwithstanding, demand for commodity will inevitably improve.

• Short-term risk as 2Q20 earnings in focus. Earnings season for 2Q20 will set the tone for the stock market in the short-term, in our view. Stocks in healthcare and technology sectors, which have seen prices rising sharply YTD will be re-assessed and would see retracements, particularly active small stocks that have returned more than 3-fold quarter-to-date. We foresee banks’ earnings under pressure from weak loan demand and lower interest rates environment, hence putting the KLCI in check.

Source: BIMB Securities Research - 10 Aug 2020