War Clouds Increased Downside Volatility

The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) engaged in choppy trade over the previous week, influenced by China’s sustained deflationary pressure and weaker than expected export growth, especially after shipments to the US plunged 34.5% YoY due to tariff. Investors were also sidelined while they kept a close eye on trade discussions between the US and China. Blue chips then made gains after both parties agreed to implement a trade framework that would ease export restrictions. However, the local benchmark index staged a profit-taking correction towards the end of the week amid rising tensions in the Middle East.

Week-on-week, the FBM KLCI gained 1.32 points, or 0.09 percent to 1,518.11, as advances in YTL Corp (+12sen), YTL Power (+19sen), 99 Speed Mart (+7sen), QL Resources (+11sen) and Petronas Chemicals (+8sen) counteracted losses in Sime Darby (-11sen) and Nestle Malaysia (-RM3.30). Average daily traded volume last week increased to 2.84 billion shares versus the 2.46 billion shares the previous week, while average daily traded value grew to RM2.13 billion versus the RM2.05 billion average the previous week.

Focus on Israel-Iran Conflict and Zafrul’s Visit to US

The local market is expected to take its cue from the sharp correction in U.S. equity markets last Friday, triggered by escalating tensions between Israel and Iran. If the conflict spreads across the Middle East and disrupts global crude oil supply, it could have farreaching consequences for the broader economy. The situation could deteriorate further if Israel’s ally, the U.S., and Iran’s supporters, Russia and China, become directly involved. As a result, the benchmark FBMKLCI index may face downward pressure as investors pivot toward safe-haven assets. However, a glimmer of hope remains should both parties agree to a ceasefire and enter negotiations. Additionally, Investment, Trade, and Industry Minister Tengku Zafrul Aziz’s visit to Washington this week could bolster investor sentiment if trade discussions yield favourable outcomes.

More Uncertainty and Volatility

Israel launched preemptive military strikes against Iran on June 12, 2025, citing existential threats following repeated warnings from Iran’s political and military leadership to annihilate Israel. The operation, dubbed "Rising Lion," targeted Iran’s nuclear infrastructure, military installations, key leadership figures, and nuclear scientists. The US has denied any involvement and said Israel acted unilaterally for self-defence. However, Iran's army is not convinced that the US is not involved. This conflict adds further uncertainty to an already strained geopolitical landscape, with Russia’s war in Ukraine escalating, India and Pakistan experiencing renewed tensions following their brief four-day war, and China’s territorial disputes with multiple Asian nations intensifying. The war is expected to drive up oil prices, disrupt global supply chains, exert inflationary pressure on goods and services, and potentially hinder any Federal Reserve easing in 2025.

On the first day of the attack, financial markets remained relatively muted, but volatility surged on the second day, as evidenced by contractions across all tracked markets. Meanwhile, commodity prices particularly gold and crude oil spiked in response to heightened geopolitical uncertainty.

Comparing this to the Hamas attack on Israel on October 7, 2023, the initial reaction was mostly muted but prices of crude oil and gold jumped. However, within a month, most financial markets recovered and moved higher in the next three months, with notable exceptions like Hong Kong and China, which continued to struggle. The current conflict, however, presents a fundamentally different risk profile. Unlike the Israel-Hamas war, which involved a state and a militant group, the Israel-Iran conflict now engages two nations with strong military capabilities, backed by global superpowers. This heightened geopolitical complexity could lead to prolonged market volatility, particularly in energy markets, as crude oil prices have already surged.

Tehran’s regional influence has eroded following Israel’s successful efforts to significantly weaken Iran-backed groups, including Hamas in Gaza and Hezbollah in Lebanon, while also intensifying attacks on the Houthis in Yemen. Additionally, the U.S.-brokered strategic agreement with Syria’s new leadership, Ahmed al-Sharaa, after the fall of Bashar al-Assad in December 2024, has further disrupted Iran’s regional supply chains, particularly its ability to fund and arm Hezbollah and other allied factions. With diminished geopolitical leverage, Tehran has been forced to reassess its regional strategy, and reports indicate that it may have accelerated its nuclear program as an alternative deterrent. Israeli intelligence assessments—though unverified—allege that Iran possesses enough enriched uranium to produce multiple nuclear warheads within weeks, a justification Israel used for its June 12 military action.

With limited regional support, the destruction of its military and nuclear facilities, and the elimination of key military leaders and nuclear scientists, Iran may turn to global allies such as China, Russia, and North Korea for assistance. However, Russia’s ability to provide undivided support is constrained by its ongoing war in Ukraine, where it is also receiving aid from China and North Korea. This could limit their involvement in the Israel-Iran conflict. Nevertheless, this does not necessarily indicate a swift resolution, as Iran retaliated on a massive scale on Saturday, prompting Israel to vow further countermeasures. Meanwhile, U.S. President Trump and Russian President Putin have spoken over the phone about ending the conflict through negotiations, but Iran remains unwilling to return to the discussion table on its nuclear program following Israel’s preemptive strike. As a result, the war could last for several months and may escalate further if additional nations become involved.

Crude Oil Supply Disruptions Can Boost Inflation and Affect Global Economy

Iran, a member of the Organisation of the Petroleum Exporting Countries (OPEC), produces approximately 3.3 million barrels per day (bpd) and exports over 2 million bpd of crude oil and refined fuels. Among OPEC members, Saudi Arabia and the UAE are the only producers with spare capacity that can be activated immediately—2.5 million bpd and 1 million bpd, respectively. Outside OPEC, Russia faces limitations due to sanctions, while the U.S. could contribute an additional 1.2 million bpd. While this combined capacity could theoretically offset disruptions, Iran has previously warned that it would retaliate against any suppliers filling gaps left by sanctions or attacks. Given these uncertainties, oil prices could surge beyond USD90 per barrel, potentially surpassing USD 100 per barrel if Iran’s oil infrastructure is severely impacted.

The inflationary impact would escalate dramatically if Iran blocks the Strait of Hormuz, the world’s most critical oil shipping lane. While Tehran has repeatedly threatened to do so, physically sealing off the strait is nearly impossible. However, targeting cargo ships passing through could provoke severe retaliation, particularly from the U.S., which may deploy its aircraft carriers to de-escalate tensions. The Strait of Hormuz, located between Oman and Iran, connects the Persian Gulf to the Gulf of Oman and the Arabian Sea. Approximately 20.8 million barrels of crude, condensate, and refined fuels pass through daily, making it irreplaceable in the short term. In response to potential disruptions, countries will scramble to find alternative routes, ramp up production, and release strategic reserves.

This situation echoes the 1973 oil crisis, when the Organisation of Arab Petroleum Exporting Countries imposed an embargo on the U.S. in retaliation for its military support of Israel. The embargo disrupted 5 million barrels of daily supply, causing oil prices to quadruple. A similar scenario today could push crude oil prices toward USD150 per barrel, albeit temporarily, before inflationary pressures and demand destruction trigger a correction. We are maintaining our current crude oil price assumption of USD73/bbl in 2025 pending clarity on current turmoil.

Israel-Iran War and Tariff Impact on Our FBMKLCI Target

Our base-case FBMKLCI target of 1,660 for 2025 assumes a favourable trade resolution that will retain the current 10% tariff while allowing greater flexibility for U.S. exporters to penetrate the Malaysian market and geopolitical tensions will be contained. Malaysia is expected to secure a more advantageous trade arrangement relative to most ASEAN peers—except Singapore and the Philippines—given its comparatively lower net exports to the U.S., which reduces exposure to tariff-related downside risks.

Conversely, our worst-case scenario of 1,580, based on minus 1-std deviation (CY26 EPS of 115.93 and PER of 13.6x) to long-term mean PER of 16x, assumes a broad-based 24% tariff reinstatement, with exemptions granted only to semiconductor products and select components, and the latest conflict between Israel and Iran is contained. Higher tariff likely to weigh on market sentiment, triggering risk-off positioning and a recalibration of earnings expectations across key sectors. The shift in risk appetite could be drastic if the Israel-Iran war escalates and prolongs, potentially engulfing other Middle Eastern nations. If alliances solidify—with the U.S. backing Israel and Russia supporting Iran—the June 2023 low of 1,369.41 could be retested, with 1,300 acting as a critical support level, based on minus two standard deviations from the long-term mean. However, under such extreme geopolitical uncertainty, predicting the absolute market bottom remains highly speculative and the 2020 low of 1,207 during Covid could act as a strong support.

Investment Strategy

No change in our view to buy undervalued blue chips (CDB, CIMB, HLBANK, PBBANK, TENAGA and TM), domestic plays (BNASTRA, PTRANS, GAMUDA and SIMEPROP) and defensive stocks (CLMT, DPHARMA, F&N, PADINI, SAMAIDEN and SPTOTO). Point to note, escalation and prolonged war could lead to airspace closures over Israel, Iran, Iraq, and Jordan and higher fuel prices. This will disrupt global travel and logistics, increasing costs for airlines (CAPITALA) and shipping (MISC) firms. While higher fossil fuel prices could increase attractions in renewable energy players, brownfield players in the oil & gas sector will benefit as they have relatively lower capital expenditures compared to greenfield projects and can capitalise on price spikes without significant new investment. As rising crude oil prices often lead to higher trading volumes due to stocking up activities, demand for MISC’s fleet of petroleum and LNG carriers can increase. Its floating production storage and offloading units are crucial for brownfield redevelopment projects as well. VELESTO’s rigs are engaged in drilling and maintenance in brownfield sites while its Workover & Intervention Services provides hydraulic workover units, enabling recompletion and intervention to extend the life of aging wells. It also offers threading, inspection, and repair services for pipes used in complex wells, supporting brownfield optimisation. While PANTECH is not directly involved in operating brownfield assets its pipes, valves, fittings, and other components are widely used in the oil and gas industry.

Corporate

Axiata Group Bhd has completed the sale of its Myanmar tower operations for a revised US$90.0mn (RM380.4mn), down from the originally proposed US$150.0mn. The sale was made via its 63.0%-owned unit edotco Group Sdn Bhd. The group said the revised price was agreed on a willing-buyer, willing-seller basis after a strategic review, which included an outreach to alternative credible potential acquirers. (Bursa Malaysia/The Edge)

Dialog Group Bhd (Not Rated) had won a 14-year production-sharing contract (PSC) from Petronas for the development of the Mutiara Cluster field in Sabah. Dialog will serve as the sole operator with a 100% participating interest in the five-field cluster Nymphe, Nymphe North, Kuda Terbang, Benrinnes, and Mutiara Hitam. This marks the first PSC Petronas awarded under the Malaysia Bid Round 2025, with first production targeted for 2029. The contract includes a 2-year pre-development phase, followed by a 2-year development phase, and a 10-year production phase. (Bursa Malaysia/The Star)

A consortium led by DCAH Holdings and individuals Chiong Kiau and Chiong Hang Leong has acquired a 10% stake in Kretam Holdings Bhd (Not Rated) for about RM162.0mn, becoming its second-largest shareholder. The acquisition comes at a time when food oil prices have re-rated higher in recent years amid persistent geopolitical tensions and weather disruptions that have weighed on supply. The 10% stake is based on Kretam’s closing share price of 69.5sen. Part of the transactions were done at a premium of 7.9% to Kretam's closing price. (Bursa Malaysia/The Edge)

KJTS Group Berhad (Not Rated) had entered into a Memorandum of Understanding with Shenzhen Envicool Technology Co., Ltd. (Envicool) on 13 June 2025 to jointly pursue data centre infrastructure projects, with a focus on innovative, energy-efficient cooling solutions in ASEAN. Envicool is the world’s leading provider of precise temperature control and energy-saving solutions and products. (Bursa Malaysia/New Straits Times)

UUE Holdings Bhd (Not Rated) has secured 3 new contracts worth RM83.4mn. The latest wins awarded by Sutera Utama Sdn Bhd were announced just 3 days after UUE reported securing RM92.4mn worth of deals. With these additions, the company’s order book has reached a record high of RM416.0mn, providing earnings visibility for the next 2 to 3 years. (Bursa Malaysia/The Edge)

NuEnergy Holdings Berhad (Not Rated) had accepted offers for the disposal of 20,625,000 ordinary shares on 13 June 2025, representing 10.14% equity interest in Hengyang Petrochemical Logistics Limited via married deal through Singapore Exchange, for a total cash consideration of SGD3.3mn. The disposal consideration of S$0.16/share was arrived at on a “willing buyer willing seller” basis, taking into consideration of a discount of 1.25% over the last 5 months’ share price of S$0.16. (Bursa Malaysia)

Rex Industry Bhd (Not Rated) has received a mandatory takeover offer at 10.0sen/share from new major shareholder ETA Industries Sdn Bhd, after the latter acquired a 40.6% stake for RM26.8mn, or 10.0sen/piece. Included in the deal is the acquisition of 39.2% of Rex's total warrants at half a sen per warrant. Under the takeover rules, ETA Industries is required to extend the offer to the rest of Rex Industry’s shareholders. Nevertheless, ETA’s CEO Lim Chin Hui intends to maintain Rex Industry’s listing on Bursa Malaysia. (Bursa Malaysia/The Edge)

Ping Edge Technology Bhd (Not Rated), a commercial kitchen equipment supplier, closed 52.2% or 12.0sen higher at its trading debut on Bursa Malaysia’s LEAP Market on Friday. Shares of Ping Edge opened at 24.0sen, just 1.0sen up or 4.4%, over the reference price of 23.0sen. The company the second to be listed on the LEAP Market this year jumped to 35.0sen by 9.30am in light trading and stayed there till market closed. (The Edge)

IOI Corporation Bhd said former Bursa Malaysia Bhd chairman Tan Sri Abdul Wahid Omar will join its board as a senior independent and non-executive director on June 16, 2025. The announcement comes after Abdul Wahid's appointment to the board of Cypark Resources Bhd (Not Rated) last week as its chairman. (Bursa Malaysia/The Edge)

Cuckoo International Bhd (Not Rated), which is slated to debut on the Main Market of Bursa Malaysia on 24 June 2025, saw modest demand from the Malaysian public for its initial public offering, with an overall oversubscription rate of less than 1.5 times. The group has received 7,908 applications for 69.3mn shares, just 1.42 times over the 28.7mn shares offered. (Bursa Malaysia/The Star)

Economy

Malaysia's wholesale and retail trade growth slows in April during Ramadan month

Malaysian consumers spent at a slower pace in April during the Ramadan month while digital payments rose, official data showed. Wholesale and retail trade, including vehicle sales, was up 4.7% when compared to the same month in 2024 and totalled RM151.7bn in April, according to the Department of Statistics Malaysia (DOSM). That compares to March’s 5.7% year-on-year gain. Sales slipped 1.5% month-on-month. On a year-on-year basis, the retail subsector was up 4.7% to RM66.8bn in April in line with consumer spending patterns during the festive month. DOSM also highlighted that digital payment recorded strong year-on-year increase in April with electronic money transactions surging 69% to RM19.7bn, reflecting higher usage in micro and retail payments. Real-time retail payments platform transactions totalled RM277.8bn, the highest value among payment methods, and internet-based payment transactions amounted to RM35.5bn while credit card use remained steady at RM17.7bn and debit card transactions were RM13.3 billion. (The Edge, DOSM)

Now Not the Time to Reintroduce GST

The government is not ready to reintroduce the Goods and Services Tax (GST) as it would affect all segments of society, particularly the poor, said Datuk Seri Anwar Ibrahim. The prime minister said GST is a broad-based tax that would be applied uniformly to all consumers, regardless of income, including fishermen, smallholders or street cleaners. “GST taxes everybody. While it is efficient and straightforward, just six per cent across the board, I must ask, if everyone has to pay six per cent, why should the poor and the unemployed be taxed as well?” he said when closing the Perak Madani Rakyat Programme (PMR) 2025. Anwar said that although the opposition has suggested GST as a better option, the government has chosen to postpone its implementation to avoid burdening the people, who are still struggling with the rising cost of living. Anwar said the government is retaining the sales and services tax (SST), which is more targeted in nature, particularly on imported luxury items such as avocados and cod, products typically consumed by high-income earners. (The Edge, Bernama)

Indonesia Aims to Seal EU Free Trade Agreement in 2026, Official Says

Indonesia aims to seal a free trade agreement with the European Union in 2026, Indonesian trade ministry official Djatmiko Bris Witjaksono said on Friday, after the two sides completed their latest round of negotiations. Indonesia and the EU have been in discussions on the agreement for about nine years, and are aiming to sign and ratify it by next year, Djatmiko told reporters, adding it could come into effect by late 2026 or early 2027. The EU has committed to provide market access to priority Indonesian products such as palm oil, textiles, footwear and seafood, Djatmiko said. Indonesia and the EU have previously clashed on tougher EU trade rules for products with potential links to deforestation, which could have an impact on shipments of Indonesian palm oil. In turn, Indonesia has also pledged to increase market access for agricultural and manufactured goods from the EU, Djatmiko said. EU ambassador to Indonesia Denis Chaibi said negotiations are ongoing and "substance will determine timing." The main benefits of the free trade deal for Indonesia include increased foreign direct investment from the EU in sectors like renewables, semiconductors, and mineral derivatives, a presentation slide presented by Djatmiko showed. (Reuters)

PBOC Plans Second Cash Injection Via Outright Reverse Repos in June

China's central bank will inject cash via outright reverse repos for the second time this month, it said on Friday, aiming to ease funding pressures during the peak season for bond financing. The People's Bank of China said that it would inject 400bn yuan (US$55.70bn or RM236.8bn) into its banking system via outright reverse repos on June 16. The tenor of the repos is six months. The PBOC surprised the market by injecting one trillion yuan such repos in the three-month tenor last week, as banks brace for a record four trillion yuan in interbank negotiable certificate of deposit (NCD) maturities this month. China's central bank has been very carefully managing the liquidity conditions this year to aid the broad economy without replicating a relentless bond rally seen late last year in what policymakers feared could fuel asset bubbles and trigger financial instability. This week, net government bond financing hit a seasonal peak of 410bn yuan. (Reuters)

US Consumer Sentiment Jumps as Inflation Expectations Improve

US consumer sentiment rose by the most since January 2024 as concerns about the economy eased and short-term inflation expectations showed a marked improvement. The preliminary June sentiment index rose 8.3 points from a month earlier to 60.5, according to the University of Michigan. The figure easily topped all expectations in a Bloomberg survey of economists. Consumers expect prices to rise at a 5.1% rate over the next year, the data released on Friday showed. That is down from 6.6% in May and marks the steepest monthly drop since October 2001. They saw costs rising at an annual rate of 4.1% over the next five to 10 years, compared with 4.2% in May. The increase in the sentiment gauge is the first this year and shows less anxiety surrounding President Donald Trump’s protectionist trade policy. The survey showed a sharp improvement in expectations for the economy and the biggest rise in expectations of personal finances in more than three years. (The Edge, Bernama)

ECB's Lagarde Says 2% Inflation Target in Reach — Report

The European Central Bank's inflation target of 2% is in reach, ECB President Christine Lagarde was quoted as saying in an interview published on Saturday. In the interview with China's Xinhua news agency earlier this week which was released on the ECB website, Lagarde said financial stability was a prerequisite for price stability. “We are within reach of the 2% medium-term inflation target that we have defined as price stability," she said. Earlier this month, the ECB lowered its inflation forecasts for this year and next in the 20-nation eurozone, projecting inflation of 2.0% in 2025 and 1.6% in the coming year. Lagarde also noted that the ECB's efforts to create a digital currency were getting to the point where, if lawmakers support the proposal, it should be ready to move forward. (Reuters)

UK Inflation Expectations Soften in May

Britons' short-term inflation expectations softened in May, the latest quarterly Inflation Attitudes Survey conducted by Ipsos on behalf of the Bank of England revealed Friday. The one-year ahead inflation expectations fell to 3.2% from 3.4% estimated in February. Respondents assessed the current inflation at 4.7%, down from 4.9% in February. In five years' time, respondents expect inflation to be 3.2%, unchanged from the estimate released in February. By a margin of 67% to 5%, respondents' assessed that the economy would end up weaker, rather than stronger, if prices started to rise faster, compared to 71% and 4% respectively in February. The survey showed that 41% of respondents said the inflation target was 'about right', compared to 39% in February. The proportions saying the target was 'too high' or 'too low' were 33% and 10% respectively. (RTT)

Eurozone Trade Surplus Declines to 3-Month Low

Eurozone trade surplus declined to a three-month low in April as demand from the US softened following tariff hikes, official data revealed on Friday. The trade surplus declined to EUR9.9bn in April from EUR37.3bn in March, Eurostat reported. This was the lowest surplus since January. In the same period last year, the surplus totaled EUR13.6bn. Moreover, the surplus was below the expected level of EUR18.2bn. Exports logged an annual decrease of 1.4% in April, in contrast to the 13.8% increase in March. This was the first decline since November. At the same time, imports grew marginally by 0.1% after rising 8.7% in the previous month. On a seasonally adjusted basis, exports slid 8.2% monthon-month in April and imports dropped 3.0%. Consequently, the trade surplus declined to an adjusted EUR14.0bn from EUR28.8bn in March. During January to April period, the euro area recorded a surplus of EUR71bn compared to a EUR68.6bn surplus in the same period last year. The EU trade balance showed a surplus of EUR7.4bn in April, down from a EUR35.5bn in March. The decline was primarily due to the contraction in the chemical sector surplus, which fell over 50%. (RTT)

Source: TA Research - 16 Jun 2025