KUCHING: Contrary to market optimism at the beginning of the year, a combination of natural disasters, geo-political risks, rising commodity prices, inflation and prospects of tighter monetary policy in emerging economies, had sent global equities reeling.
The local bourse, however, outperformed most of its regional peers as the bellwether index, FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) had only corrected by 4.66 points, or minus 0.3 per cent, during the period under review.
According to the ‘Market Outlook and Strategy 2Q2011’ report by RHB Research Institute Sdn Bhd (RHB Research), all this was partly on account of the low-beta characteristics and defensive nature of the Malaysian market. It was also partly because of high domestic liquidity as well as the strong local participation of the government-linked company (GLC)-linked funds in the local market.
“The inflow of foreign funds into local equities, which became visible since June last year, continued into the new year. This, coupled with the release of positive economic data supporting the strength of the global economic recovery and asset reallocation exercise by institutional investors at the beginning of the year, caused the market to continue trending up,” the report said.
Moreover, the FBM KLCI benchmark reached a higher of 1,572.21 on January 7 before profit-taking activities set in.
Subsequently, the index was stuck in a narrow trading range given the lack of fresh leads but succumbed to selling pressures thereafter when the fear of surging inflation and more interest rate hikes in the developing world started to emerge.
“This was particularly the case when the release of a stronger than expected fourth quarter gross domestic products (GDP) growth in China raised concerns that more significant tightening measures would be needed in China and that emerging economies were all behind the curve in policy tightening.
“As share prices in emerging markets had gone up substantially in the second half of last year with valuations already close to fair levels compared with the historical range, many global funds took profits from the emerging markets and increased their weighting in developed markets such as the US, Europe and Japan,” the RHB Research report stated further.
As a result, the local bourse, just like other emerging Asian markets, came under selling pressure. The situation took a turn for the worse when political unrest hit Tunisia, which eventually resulted in the fall of its dictatorial regime.
As the political upheavals spread to Egypt and other Middle East and North Africa (MENA) countries, oil prices surged on fear that oil supply lines could be disrupted. The Dow Jones Industrial Average suffered one of its biggest one-day losses on January 28 and this unsettled global financial market.
There were rising concerns that the spike in oil prices could further fuel inflationary pressure. The FBM KLCI benchmark fell to a low of 1,494.52 on February 11.
Following the sharp sell-off, the market bounced back and the KLCI reached a high of 1,525.85 on February 21 as Wall Street rallied on the back of the continued stream of fairly upbeat economic data and the Fed Reserve’s upward revision in its 2011 GDP growth forecast to 3.4-3.9 per cent.
“This rally, however, was not sustained as growing unrest in MENA turned to haunt investors,” said the report, adding that coupled with rising oil prices and escalating concerns on inflation, “it sent the KLCI benchmark breaking its psychological 1,500 levels on February 21 before falling to a low of 1,489.27 on the subsequent day”.
The FBM KLCI benchmark recovered to a high of 1,523.69 on March 9 but on volatile trading, affected by jitters over growing unrest in MENA, high crude oil prices, rising inflationary pressures, policy tightening in emerging countries and renewed concern on the euro-debt crisis as sovereign ratings in peripheral Europe were being downgraded by international ratings agencies.
The market, however, took a turn for the worst on March 11 after a powerful earthquake rocked Japan’s north-eastern coast, triggering a tsunami and damaged nuclear reactors that caused radiation leaks. The threat of a full-blown nuclear catastrophe sent panic investors fleeing from risky assets to safe-haven government debt papers.
“Asian equities plunged and the FBM KLCI benchmark fell to below the 1,500 psychological level once again and closed at 1,495.62 for the day,” the research pointed out.
As the Japanese disaster deteriorated and coupled with the worsening political unrest in MENA, the Nikkei tumbled another 6.2 per cent on March 14 and plunged a further 10.6 per cent on the following day to close at 8,605.15 – its biggest one day drop since the 11.4 per cent fall of October 16, 2008 and global equities came under severe selling pressure.
Year-to-date, the FBM KLCI benchmark was relatively flat, down marginally by 0.3 per cent but outperforming most of its regional peers. It has, however, underperformed the Chinese markets (plus 0.7-6.3 per cent), South Korea (plus 0.3 per cent), Hong Kong (plus 0.1 per cent) and Thailand (no change).
During the quarter under review by RHB Research, only four sectors recorded positive share price performance, including industrial products (plus 5.8 per cent), property (plus 4.6 per cent), consumer (plus 1.5 per cent) as well as services and trading (plus 0.3 per cent). The mining sector, which surged 98.8 per cent in the fourth quarter of 2010, corrected by 19.4 per cent during the quarter under review.