Worst may not be over yet for economy

By FINTAN NG

PETALING JAYA: Despite the Kuala Lumpur Composite Index (KLCI) closing up 1.70% to 909.84 last Friday, a number of analysts do not believe the momentum is sustainable because the worst is not yet over for the economy.

The KLCI closed down 2.65 points to 907.19 yesterday in line with most Asian bourses as investors viewed negatively the lack of a firm response from G7 finance ministers who met in Rome.

The analysts said they believed deteriorating macroeconomic fundamentals at home and abroad would continue to haunt the local equities market while there were also concerns over how the country was going to fund and execute the pump-priming measures that would be announced on March 10 in a mini-budget.

AmResearch Sdn Bhd research head Benny Chew said while the market performance had been “quite robust” in the face of the domestic political turmoil, the macroeconomic fundamentals remained weak.

“We’re also very concerned about the capital raising that is taking place in the market. It raises the question of whether there’s going to be a hollowing-out of the domestic money market,” he told StarBiz.

Chew said the market had priced in the expectations of pump-priming but not its funding and execution. “In light of the very tough funding environment, there’s the question of how the Government is going to fund the spending to boost the economy,” he said.

Jupiter Securities Sdn Bhd research head Pong Teng Siew said there was a need to keep an eye on government expenditure as it would affect its ability to borrow in the long term should Malaysia’s credit rating be affected.

“It will not be to the country’s advantage to spend and then see the cost of borrowing go up because the credit rating has been affected,” he said.

Pong also said external factors still outweighed any domestic economic or political factors in influencing the market besides the perception of foreign funds on the local economy. “In the fourth quarter of 2008, they accounted for over 40% of trade on Bursa Malaysia,” he said.

Meanwhile, HwangDBS Vickers Research Sdn Bhd analyst Goh Yin Foo said in a report that there was a chance for the KLCI to plot a mini upward trend in the short term but, in the absence of a belief that the worst was over for the economy, “any market recovery should be viewed as a relief rally.”