KUCHING: Analysts are cautiously optimistic on the local equity market based on a key assumption where crude oil price would rebound to a target average of circa US$75 per barrel.
“We projected new equilibrium levels of crude oil price and postulated a ‘sweet spot’ price for Brent crude of US$75 to US$80 per barrel.
“At around that target level, we reckon it would be, a plus to growth and inflation,” said MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) analysts.
“As a marginal net exporter of crude oil, we see the decline in price as essentially a massive wealth transfer to the domestic users from the government and producers.
“It is noteworthy that sustained price decline at significantly below the target level may give rise to other concerns relating to fiscal, external balance and currency issues,” it added.
The analyst does not believe that the equity market is at the cusp of a secular downturn but rather within the midst of a cyclical pullback.
While the overall macro pictures may be slightly weakened due to fiscal and currency concerns, they are far from unravelling premised on the outlook on crude oil prices.
“In fact, we believe recent market reaction may have disproportionally discounted the potential impact of lower crude oil price on the nation’s fundamentals,” it explained.
Furthermore, MIDF Research opines that any secondary fallout from the slumping crude oil price shall be ‘largely contained’ to among the major net exporting countries. Hence it expects the FBM KLCI to resume on its upward trajectory soonest the crude oil prices regain its foothold.
“Going forward, while we expect crude oil price would recover to a target average of circa US$75 per barrel, however, the timing of price recovery may not be as swift as earlier thought.
“The main reason being the anticipated slowdown in crude oil output in reaction to the lower prices may not be as forthcoming.
“This is due to the continued insistence by conventional crude oil producers to maintain their production levels despite lower margins, and rather unexpectedly, the ability of unconventional producers to continue on pumping at high levels as many are still shielded by their financial hedges.”
As stated earlier, any sustained price decline at below the target level may aggravate market concerns relating to the government’s fiscal position, deterioration in external trade balance and relative weakness of the Ringgit.
Hence consequent to the expected delay in the timing of crude oil price recovery, the pace of equity market upturn may also be similarly affected thus expect a more moderate FBM KLCI trajectory going forward, explained MIDF Research.
While the pullback in crude oil price is not expected to result in wider systemic fallout, nevertheless it managed to trigger a re-assessment of market valuation hence the downward shift in FBM KLCI trend channel.
Technically, the FBM KLCI has given up the upper half secular channel and the research house does not expect it to revisit the lost territory anytime soon.
“Hence, it is expected to gravitate around the mid- as opposed to towards the upper-end of its lower half secular channel during the next 12 months.”