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Stocks on the domestic market stayed largely rangebound with downside bias last week, as the final leg of the corporate results reporting season for the fourth quarter of last year came in mostly below market expectations.
Gains in Tenaga Nasional, BCHB and Telekom were overshadowed by losses in TM International, Maybank and MISC.
The Kuala Lumpur Composite Index (KLCI) was up a mere 0.96 point, or 0.1 per cent for the week to close at 890.67, as daily average trading volume and value dwindled to 343.7 million shares and RM578.3 million respectively, compared with 352.7 million shares and RM537 million in the previous week.
Last week, Bank Negara Malaysia made a surprise 50 basis point cut in its Overnight Policy Rate to 2 per cent and reduced the Statutory Reserve Requirement by 100 basis points to 1 per cent. The move shows that the central bank is in touch with market reality and the dire state of Malaysian economy as all its key trading partners have shown drastic weakness in their economies in last two quarters.
The central bank is likely to pursue further aggressive monetary loosening in the months ahead, potentially another 50-basis point cut by mid-year, which could weaken the ringgit and help exporters but increase the cost of operation for those relying heavily on imports and high foreign borrowings.
Malaysia's economic expansion disappeared in fourth quarter 2008 (Q408) and it barely remained above water with a negligible growth of 0.1 per cent that led a full year growth of 4.6 per cent. The services sector saved the day when manufacturing and mining activities slowed in Q408 due to weak external demand and lower output respectively. From a demand side perspective, public consumption came to the aid when it grew 13.8 per cent against 6.9 per cent in the third quarter to fill the gap from a narrowing growth in private consumption (5.3 per cent in Q4 vs 8.1 per cent in Q3). Net real exports plunged 40.1 per cent. Taking the cue from the disastrous external economic data, there are barely any signs to indicate that the first quarter of this year will be any better.
The likelihood of Malaysia's Q109 GDP growth plummeting into negative territory is a very real if domestic demand does not pick up the slack. Judging from recent retrenchments and current consumer appetite, the Malaysian economy could contract between 1 and 2 per cent in the first half of 2009 before we see the impact of the close to US$2 trillion (RM7.34 trillion) global stimulus packages trickling down to revive global demand. The recently concluded corporate earnings season has already shown the negative impact of the slowing economy on listed companies as one in three reported lower-than-expected earnings. Chances are bright that consensus forecast for 2009 will reflect a broad-based cut in earnings that will lead to a high single-digit or double-digit contraction in earnings.
Thus, it is crucial that everyone plays his or her role to at least keep domestic demand afloat. It is crucial not to throw a wet blanket on the economy by announcing counterproductive measures like the increase in toll rate that was quickly retracted after the intervention of the prime minister. Higher toll rates will lead to higher price of goods and services as the North-South Expressway, one of the affected highways, is the backbone of Malaysia's land transport network.
It is high time to review all road concession agreements and include a clause to verify that the underlying assumptions that justify a price increase are still applicable before allowing a toll increase. The statistics provided by toll concessionaires should be verified and certified by an independent third party so that vested interest does not jeopardise the accuracy of the data.
If we continue to allow price increases although the demand dynamics have changed and do not justify the increase, then there won't be any incentive for the toll operator to operate efficiently. This defeats the rationale of privatisation. So the moral of the story is private sector also should play its part in current economic downturn and bite the bullet if they are still making money. After all PLUS made a good pretax profit of RM1.5 billion (up 15.9 per cent year-on-year) in fiscal year 2008 while Litrak made RM117 million (up 5.5 per cent year-on-year) in the first nine months of its 2009 fiscal year.
The local market's recovery last Monday aided by the strong rebound in the region failed to be sustained due to weak buying momentum and persistently cautious undertone. Stocks traded sideways the next day despite sharp losses in overnight US and regional markets, but then staged a late rally fuelled by hopes Bank Negara will cut interest rates further.
Although the wish for a reduction in the OPR was confirmed by a half-percentage point cut to 2 percent, the market gave back early gains on Wednesday despite rallies in the region. On Thursday, stocks extended rangebound trading in light volume as investors stayed on the sidelines, prior to closing near lows ahead of the weekend due to speculation fourth quarter GDP numbers would come in weaker than expected.
The KLCI was stuck last week between a low of 883.81 early Tuesday and high of 898.74 early Wednesday.
The daily slow stochastics indicator for KLCI has hooked down and is poised to trigger a short-term sell signal after last Friday's weak close (Chart 1), but weekly indicator continued its upward journey following the previous week's buy signal. The 14-day Relative Strength Index (RSI) stayed below the mid-point, while the 14-week RSI stayed below the 40-point mark.
Meantime, a sell signal was triggered on the daily Moving Average Convergence Divergence (MACD) trend indicator, but the weekly MACD extended its journey northwards. The +DI and the -DI lines on the 14-day Directional Movement Index (DMI) trend indicator expanded outwards after triggering sell last week, but the ADX line dipped below the 10-point mark, indicating a deterioration in trend.
Further weakness can be expected this week given the sharp losses suffered on Wall Street last Friday, after the US economy shrank at a weaker-than-expected 6.2 per cent in the fourth quarter of last year. Falls should spill over to regional markets, while on the domestic front, the weaker-than-expected fourth quarter GDP of plus 0.1 per cent should further depress local sentiment given higher possibility for a technical recession this year.
On the KLCI, the decisive breakdown below the middle Bollinger band at 893 last week will grease downside towards next meaningful support at 869, the 50 per cent retracement of the upswing from 801 pivot low to 936 high, which mirror the late January lows. Downside momentum will also increase upon a breakdown below the lower band of the rising wedge congestion pattern. This important support must hold to prevent further losses towards the next cushion at 853, the 61.8 per cent retracement level.
Stock-wise, we continue to advocate investors reduce exposure in banks such as AMMB, BCHB and Maybank due to the likely fallout from sharp falls in financials shares globally, and switch to bargain top-tier construction stocks Gamuda and IJM Corp expected to benefit from the second stimulus plan to be unveiled on March 10. Defensive gaming stocks such as BToto, Genting, Resorts World and Tanjong plc are good buys for longer term gains.
The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.
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