Overbought Momentum Conditions Point to Profit-Taking Consolidation

While the local blue-chip benchmark index surged upwards with a double-digit gain on the first trading day after the Chinese New Year holidays last Tuesday fuelled by strong buying interest in major banking stocks, most investors remained by the sidelines due to the weaker trading volumes and lacking positive domestic market leads. Nonetheless, following a two-day consolidation, it managed to climb to a fresh 20-month high ahead of the weekend, as investors returned to bargain hunt banking, construction and oil & gas heavyweights on expectations for more development contracts and positive news flow ahead.

Week-on-week, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) rose 21.27 points, or 1.41 percent, to 1,533.55, as gains on CIMB (+22sen), Tenaga (+40sen), Maybank (+17sen), Public Bank (+6sen), MISC (+30sen) and Petronas Chemicals (+17sen) overcame falls on YTL Corp (-14sen) and YTL Power International (-23sen). Average daily traded volume last week improved marginally to 3.06 billion shares, compared to 2.89 billion shares the previous week, while average daily traded value rose to RM2.15 billion, against the RM1.89 billion average the previous week.

Strong buying interest from foreign investors with a net inflow of RM1.4bn year-to-date, especially with continuous daily net inflow since the beginning of February, has succeeded in sustaining the recovery momentum in the FBMKLCI so far this year. Anticipation of a stronger recovery in corporate earnings, undemanding valuation, stabilising domestic politics and cheap ringgit versus the US dollar could have been the key drivers for the strong buying interest. The rising optimism that the US will avoid a recession this year despite the deceleration in economic activities and China’s indications of strong measures to revitalise its slowing economy could have also bolstered expectations of positive spillover effects on key trading nations like Malaysia.

Nonetheless, these expectations could be dashed if the delay in the US monetary easing affects consumption amidst increasing household debts, dwindling savings and faltering income growth that will drag US private investments eventually. By the same token, China too is dragging its feet on a broader stimulus and expectations are building up for more decisive and effective measures to be unveiled in the upcoming National People’s Congress in March. Thus, externally, the focus this week could be on the US Federal Reserve’s January meeting minutes and Bank of China’s decision on loan prime rate.

Locally, the lower-than-expected fourth quarter (4Q) and 2023 economic growth of 3% and 3.7% YoY versus the Department of Statistics advanced estimate of 3.4% and 3.8% YoY, respectively could push the benchmark index into a consolidation mode temporarily while investors digest the outcome and try to draw a parallel with the 4Q results reporting season, which will gain momentum this week and conclude by the end of this month. The fact that the economy contracted by 2.1% QoQ on a seasonally adjusted basis due to external slowdown and weakness in private consumption, compared to a 2.6% increase in the 3Q23, could trigger investors to be defensive while waiting for more evidence on improving external demand and resilient domestic expenditure to drive growth this year. The weaker economic growth is expected to cause downward adjustments in brokers’ forecasts, which are likely to fall at the “low to mid-range” of the government’s official forecast of 4% to 5%.

As far as the 4Q results season is concerned, it is not conclusive as only 19% or 20 out of 105 companies under our coverage have reported earnings so far, with 50% of them coming within expectations while another 15% and 35% came above and below expectations, respectively.

Source: TA Research - 19 Feb 2024