CONCERNS over the US economy entering recession aside, global stock markets could have been spooked by the high probability of a full-scale war between Israel and Iran which is backed by their respective allies.

These negative vibes which culminated in the FBM KLCI plunging 78.81 points or 4.9% to a low of 1,532.24 before closing at 1,536.48 yesterday (Aug 5) were further compounded by the unwinding of yen carry trades post Japan’s decision to tighten its monetary policy and appreciation in yen.

Among the three global developments, TA Securities Research is most wary of a full-scale war in the Middle East after the US Secretary of State Tony Blinken having told his G7 counterparts on Sunday (Aug 4) that an attack by Iran and Hezbollah against Israel “could start within the next 24 to 48 hours”.

“A direct full-scale war between Israel and Iran will escalate tensions in the Middle East and will be detrimental to global economic growth as oil prices will shoot through the roof,” cautioned head of research Kaladher Govindan in a strategy update entitled “US Recession” & Escalation in the Middle East”.

“We’ve indicated previously in October 2023 about the possibility of crude oil hitting US$150/barrel if the war escalates and Iran blocks the Straits of Hormuz.”

According to the research house, chances of further escalation in tension have increased rapidly after the recent assassination of Hamas leader Ismail Haniyeh and Senior Hezbollah commander Fouad Shukur by Israel.

“As a sign of time, the US which is Israel’s strongest ally, has already ordered additional ballistic missile defence-capable cruisers and destroyers to the Middle East to help defend Israel from possible attacks by Iran and its proxies,” warned TA Securities Research.

A worsening situation could prompt investors to move into haven assets and away from equities as sell first and decide later attitude will prevail although defensive and domestic sectors could be less hit by the ongoing turmoil.

“The scale of the recent sell-down in global and Malaysian equities indicates the correction may continue for a few days until there is more clarity on these adverse developments and the emergence of positive news flows,” observed the research house.

“As such, investors could be better off not catching the falling knife unless the correction has reached attractive levels.”

Whatever the case is, TA Securities Research is maintaining its end-2024 target of 1,690 which is based on CY2025 PER (price to earnings ratio) of 14.4 times as the US Federal Reserve’s monetary easing cycle is around the corner.

“We believe the global superpowers will be able to contain this carnage from exploding further after an initial rampage if a war broke out,” projected the research house.

“Besides, Malaysia’s diverse economy is largely driven by domestic activities and the impact of any global economic slowdown can be contained by the on-going structural reforms and long-term economic plans.” - Aug 6, 2024

https://focusmalaysia.my/sell-off-on-bursa-may-last-a-few-days-investors-advised-against-catching-falling-knife/