The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) failed to defend a rise to a fresh 22-month high in the abbreviated Hari Raya Aidilfitri holiday trading week, as profit-taking amid lack of domestic positive catalysts and worries over the elevated and spreading Middle East geopolitical tensions clouded market tone and eroded investors’ risk appetite.

For the short three-day trading week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) eased 4.21 points or 0.27 percent, to 1,551.04, as gains in Tenaga (+18sen) and Sime Darby (+6sen) were overshadowed by falls on Axiata (-11sen), Petronas Chemicals (-15sen), Press Metals Holdings (-11sen), YTL Power (-9sen) and CelcomDigi (-5sen). Average daily traded volume last week mildly slowed to 3.77 billion shares as compared to 3.88 billion shares the previous week, while average daily traded value declined to 2.46 billion, against the RM2.64 billion average the previous week.

Profit taking pressure is expected to rise this week after Iran launched drone and missile attacks on Israel last Saturday. The first ever direct attack on the Jewish state without hiding behind its proxies in the Middle East was a retaliatory move to Israel’s attack on its consulate in Damascus on 1st April. After the attack Iran said the "matter can be deemed concluded" unless there is more violence. In a letter to the United Nations, Iran claimed that the onslaught was within the U.N. Charter framework governing the right to selfdefence and warned that it will respond in a more powerful and decisive manner if Israel reacts to those attacks. Israel on the other hand has vowed to hit back. While not keen on a counterstrike by Israel, the US has reiterated its support for the Jewish nation, indicating the tense situation can evolve into a broader regional conflict in the Middle East, potentially dragging the whole world into it as nations show allegiance to their respective allies.

The local equity market’s reaction this week is expected to mirror the Wall Street’s performance last Friday, which fell on fears of an Iran attack. The Dow Jones Industrial Average slid 475.84 points, or 1.24%, closing at 37,983.24. The S&P 500 tumbled 1.46% at 5,123.41. The Nasdaq Composite pulled back by 1.62% at 16,175.09. With a slightly stronger than expected March US consumer price index last week indicating rate cuts by the Federal Reserve could take longer than expected, the broadening conflict in the Middle East should provide more reasons for the rush to safety mentality and the US dollar’s strength, which is negative for the inflow of foreign funds into the local market and ringgit. The upside pressure on oil prices as supply concerns rise should keep inflationary pressures sticky as the contagion effect resonates on other products and services.

As such, apart from the oil and gas stocks, other commodity plays like plantation, defensive sectors like utilities, consumer staple and healthcare, and sectors with domestic flavour like construction could attract interest this week as traders bet it will benefit from the government measures to support the domestic economy from external meltdowns. As highlighted last week, we expect the 9 June 2023 low of 1,369.41 (consensus CY24 PER of 12x) and the March 2020 low of 1,207.80 (consensus CY24 PER of 10.6x) to act as strong and solid support levels, respectively should selling pressure increases due to fear of broadening war and the negative effect on supply chain and inflation before the final demand gets hit eventually.

Talking about the external sector and the economy, Malaysia’s trade data for March and 1Q24 GDP are due this Friday. According to the Bloomberg consensus forecast, exports are expected to revert to positive territory with a 2.0% YoY growth versus -0.8% YoY in February while imports expand at a slightly faster rate of 9.5% YoY versus 8.4% YoY previously. This is in-line with prevailing expectations for better prospects in the world’s major economies like the US and China and higher demand for semiconductors. Meanwhile, the economy is forecast to grow by 3.9% YoY, which is consistent with our expectations of 4.3% YoY based on encouraging monthly economic indicators, versus 3.0% YoY in 4Q23.

Externally, China is also due to announce important economic data like 1Q24 GDP, and IPI and retail sales for March this week that could provide some clues on the government’s seriousness in implementing growth measures to achieve its 5% GDP growth target in 2024 amid concerns about deflationary pressure.

Source: TA Research - 15 Apr 2024