Profit-taking ahead of the Deepavali festival holiday dragged the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) down to its lowest in more than two months, with market sentiment clouded by lack of domestic positive catalysts. Investors remained cautious as they awaited release of key economic data and corporate earnings reports from the US to assess the country’s potential growth.

Week-on-week, the FBM KLCI lost 14.32 points, or 0.88 percent to 1,603.98, as dips in Tenaga (-48sen), IHH Healthcare (-22sen), Hong Leong Bank (-58sen), CelcomDigi (-8sen), Sunway Berhad (-10sen) and CIMB (-17sen) clouded gains on YTL Power (+20sen) and SD Guthrie (+21sen). Average daily traded volume last week dropped to 2.41 billion shares versus 2.81 billion shares the previous week, while average daily traded value grew to RM2.47 billion, from the RM2.35 billion average the previous week.

This is a crucial week as the US will hold its presidential election tomorrow and the Federal Reserve (Fed) will have its monetary policy meeting on Wednesday and Thursday. Bank Negara Malaysia also will have its monetary policy meeting this Wednesday, where it is expected to hold its Overnight Policy Rate steady at 3.0% despite the high probability of Fed cutting its interest rate a day later. Meanwhile, China’s October trade data this Thursday is not expected to excite.

So far, various polls conducted in the US, especially in the swing states, showed a tight race between Kamala Harris and Donald Trump. As such, there is no assurance that a candidate who wins the popular vote can win the presidency as the electoral college can swing in the opposite direction and render the other party the minimum 270 electoral votes needed out of the total 538 electors.

A status quo where Democrats retain the presidency and the Senate will avoid unnecessary volatility in the financial markets due to policy certainty in terms of external trade, economy, climate change, social justice, foreign policy, etc. In such a scenario, we expect the FBMKLCI to recover from its recent sell down and trend higher towards our year-end target of 1,690 with most blue chips, especially banks (ABMB Buy, TP:RM5.00), (AMBANK Buy, TP:RM5.60), (CIMB Buy, TP:RM9.48), (HLBANK Buy, TP:RM23.90), (MAYBANK Buy, TP:RM11.85), (PBBANK Buy, TP:RM5.36), telco (AXIATA Buy, TP:RM2.65), (CDB Buy, TP:RM4.58), (TM Buy, TP:RM7.93) and utilities (MALAKOF Buy, TP:RM1.05), (PETGAS Buy, TP:RM21.20), (TENAGA Buy, TP:RM17.30) and (YTLPOWR Buy, TP:RM6.39) staging a strong recovery post removal of a big uncertainty.

A change where Republicans gain control of the presidency and retain the House of Representatives can create short-term volatility. A split Congress is not as bad as opposed to a situation where one party wins the presidential election but loses control over both chambers of Congress. The second scenario can lead to chaos as that will affect the president’s ability in appointing judicial nominees, forming the cabinet and voting on legislative items.

In tomorrow’s election all 435 seats in the House of Representatives and 33 of the 100 Senate seats will be contested. Currently, Republicans controls the House of Representatives with 220 seats while Democrats have 212 seats. Three seats are vacant, one held by Republican and the remaining two by Democrats. In the Senate, Republicans have 49 seats while Democrats and independent who caucus with them have 51 seats. As in most previous US presidential elections, economic issues such as employment, inflation, and overall economic growth will be key deciding factors in tomorrow’s election.

Meanwhile, stock markets hit new highs under both administrations, but it was more profound during the Trump era. For instance, the Dow Jones Industrial Average surged 56.7% to 30,930.52 during his term (20 January 2017 to 19 January 2021) versus 40.1% to 43325.09 under Biden’s presidency. Thus, despite concerns about possible greater market volatility if he is elected, his past track record and pro-business policies could excite the US financial markets and contribute to a recovery in our local market despite the short-term volatility as shown in Figure 3 and 4.

It is a common knowledge that most people are worried that a “Trump 2.0” scenario will not bode well for the US and global economy due to his tough rhetoric on trade and China. He has been trumpeting about imposing 10% to 20% tariffs on all US imports and vouched to raise it 60% for China, a move that will evolve into a tit-for-tat trade war among trading nations. This along with his pledge to lower taxes for individuals and corporates can lead to spiking inflation rates that will deter the Fed’s rate cut narratives. Of course, Trump has plans to lower energy prices by increasing supply to combat inflationary pressures, but oil is a global commodity where prices cannot be dictated by the US alone.

While a Trump victory may cause some volatility in financial markets, based on our observations between 1980 and 2020, there was a greater tendency for the S&P 500 to do well during presidential election years compared to the FBMKLCI. Nevertheless, both indices registered higher gains during a Republican president, probably due to the Republicans’ pro-business policies and the fact that most company CEOs are Republicans. Point to note is that whenever there was a change in presidency from one party to another, it has a negative impact most of the time as both indices contracted with a much greater impact on the FBMKLCI. While the uncertainty created by policy changes could be a reason, the timing was also crucial as the world was experiencing the burst of the dotcom bubble in 2000 when George W. Bush defeated Bill Clinton.

Similarly, there was a drastic change in the US trade and foreign policies after Donald Trump won in 2016 that affected the FBMKLCI but not the S&P 500. The strong correction in crude oil prices to around USD45/bb, the sharp depreciation in Ringgit, which prompted Bank Negara to intervene, and Trump’s threat to upend global trade was the main reasons for the FBMKLCI’s weak performance after Trump’s victory in 2016. The strength in the US dollar due to Trump’s pro-growth policies and bullish crude oil supply outlook from the US shale production depressed oil prices but things improved towards the year-end with the OPEC stepping in to cut supply. In fact, Petronas too committed a production cut of 20,000 barrels a day during this time while Bank Negara imposed that exporters convert 75% of their proceeds into Ringgit after bringing the money back from abroad within three months of completing a transaction to check further depreciation in Ringgit. Market reaction was much better in 2020, as the huge stimulus to revive the economy from Covid-19 meltdown prevented equity markets from reacting negatively to Biden’s victory over Trump.

This time around, the FBMKLCI’s reaction to a possible Trump victory may not be bad or as bad as 2016 as trade dynamics have changed much ever since. Trump’s protectionist policies during his tenure have encouraged manufacturers to diversify their operations away from China and some have even started operations in the US. Malaysia has and will continue to benefit from the “China Plus One” strategy. Nonetheless, Trump’s strong support for the US oil industry and promises to roll back environmental regulations may hit renewable energy stocks (SAMAIDEN Buy, TP:RM1.30) and domestic oil and gas stocks (COASTAL Buy, TP:RM1.89), (MHB Buy, TP:RM0.61), (PANTECH Buy, TP:RM1.17), (PCHEM Buy, TP:RM6.93) and (VELESTO Buy, TP:RM0.30). Trump has been vocal about reducing oil prices to lower inflation in the US if his planned tariff increases cause prices to shoot up.

Meanwhile, based on the CME FedWatch, the US Federal Reserve is expected to stick to its last September guidance for a 25-basis points cut each in November and December, respectively when the policy makers meet this week. The much weaker than expected October jobs report of 12,000 versus expected 100,000 could support these expectations although it was attributed to unexpected events like hurricanes and a Boeing strike, and unemployment rate held at 4.1%.

Source: TA Research - 4 Nov 2024