Local equities had a rough patch over the last seven trading days, affected by China’s economic stimulus measures that drove funds away from most Asian markets to downtrodden mainland equities and Hong Kong market, which filled in the vacuum after the Chinese markets were closed for “Golden Week” National Day holidays from 1 to 7 October. Share prices got a boost from 500bn yuan allocation to finance stock purchases by institutional investors and another 300 bn yuan to support company stock buyback programs. The FBMKLCI’s weakness was compounded further by worries about an escalation in the Middle East tension after Iran fired missiles into Israel last week in a show of support to Lebanon.

Week-on-week, the FBM KLCI lost 30.12 points, or 1.81 percent to 1,629.97, as gains on QL Resources (+9sen), Petronas Chemicals (+11sen) and KLK (+38sen) were overshadowed by falls in Maxis (-28sen), MISC (-39sen), HLFG (-88sen), CIMB (-32sen), PPB Group (-58sen), TM (-24sen) and Axiata (-9sen). Average daily traded volume last week rose to 3.73 billion shares versus 3.32 billion shares the previous week, but average daily traded value dwindled to RM2.71 billion, against the RM3.01 billion average the previous week.

Middle East conflict remains fluid. The US and western allies are trying their best to prevent Israel from attacking Iran directly as a retaliation after keeping mum to previous attack on its soil in April. Israel may become bolder to strike this time if it makes good progress in its ground attacks on Lebanon. If it does attack Iran, it is unclear what will be its target – nuclear, military or oil facilities. Attacking all at the same time is not an easy task when its own resources are stretched thin in multifaceted war across Gaza, Syria, Yemen and Lebanon. Moreover, its US and Western allies pressuring it to refrain from attacking nuclear facilities, fearing it will give reasons for Iran to retaliate with nuclear weapons.

Iran has several key nuclear facilities and the main ones are Nafanz, Isfahan, Fordow, Arak and Bushehr. Destroying all of them is quite impossible with some of them located deep underground. Iran is now enriching uranium to up to 60% fissile purity, close to the 90% of weapons grade, at two sites, and in theory it has enough material enriched to that level, if enriched further, for almost four bombs, according to the International Atomic Energy Agency.

Attacking oil facilities to weaken Iran economically is a viable option but its ally US may go against it fearing skyrocketing oil prices at a time it is facing a presidential election next month may work against the Democrat party. Iran produces about 3.2mn/bpd of crude oil currently and exports half of it despite US sanctions. Halting about 3% of world supply will push up prices further. Brent spot price has shot up from a low of USD69.89/bbl before the attack last Tuesday to a high of USD79.06 last Saturday and closed at USD78.09.

Targeting export facilities, especially the Kharg Island oil port that handles 90% of its exports, instead of Iran’s refineries that supply fuel for domestic industries will push prices higher in the short-term, but we believe OPEC+ has ample spare capacity to fill the gap, unless Iran attacks other Middle East oil producers or shuts the Strait of Hormuz in retaliation. Shutting the strait would easily push oil prices beyond the USD120/bbl mark as a third of the world's liquefied natural gas and almost 25% of total global oil consumption passes through it. Thus, if Israel bows to pressures from its allies, Iran’s refineries or smaller oil installations and military facilities could come under radar to avoid larger retaliation.

Nonetheless, as Iran’s reaction to these possibilities is anybody’s guess, we may see further weakness this week if investors are not convinced about the prospects of an amicable solution, at least for a short period, to Middle East tension. The bullish outlook for oil price amidst simmering tension could push up share prices of oil & gas stocks (COASTAL, TP:RM1.89), (MHB, TP:RM0.61), (PANTECH, TP:RM1.27), (PCHEM, TP:RM6.93) and (VELESTO, TP:RM0.30), defensive plays in the consumer (CARLSBG, TP:RM24.10), (HEIM, TP:RM28.02), (AEON, TP:RM1.68), (FFB, TP:RM1.97), (FOCUSP, TP:RM1.11), (ABLEGLOB, TP:RM2.57), (PADINI, TP:RM4.30) and (SCIENTX, TP:RM5.48), healthcare (DPHARMA, TP:RM1.50), (SCOMNET, TP:RM1.73), (HARTA, TP:RM3.00), (KOSSAN, TP:RM2.10) and (SUPERMX, TP:RM0.92) and Power and Utilities Sectors (MALAKOF, TP:RM1.05), (PETGAS, TP:RM21.20), (TENAGA, TP:RM17.30) and (YTLPOWR, TP:RM6.39), apart from domestic construction plays (GAMUDA, TP:RM10.37), (IJM, TP:RM4.00), (INTA, TP:RM0.72), (KERJAYA, TP:RM2.79), (SUNCON, TP:RM6.15), (TRC, TP:RM0.51) and (WCT, TP:RM1.54)

At the same time, investors also will be on the lookout for updates on consumption data during China’s long National Day holidays to gauge the effectiveness of stimulus measures announced before the holidays in boosting consumer confidence and spending. Investors also need affirmation that they will be significant follow through fiscal measures from the Chinese government after the holidays to boost consumer confidence and revive the economy, especially the property market.

In the US, the nonfarm payrolls rose by 254,000 in September, much higher than forecast 140,000 and August’s revised figure of 159,000 increase (initially 142,000). The unemployment rate also edged lower to 4.1% from 4.2%, amidst unchanged participation rate of 62.7%, while the average hourly earnings rose to 4% from 3.9% in August. These data points to a soft-landing scenario in the US economy and less likelihood for any drastic cuts in interest rate in November meeting. As such, focus this week will be on the Fed’s meeting minutes and consumer inflation data for September.

In the meantime, we may have to keep our fingers crossed for conditions to turn favourable so that these external factors do not come in the way of the usual pre-budget rally ahead of the tabling of Malaysia’s Budget 2025 on 18 October.

Source: TA Research - 7 Oct 2024