Weaker-than-expected economic data from China and the US last week cut short the four-week gain on Bursa Malaysia blue chips, as they fell in sympathy with global stock markets on concern the global economic recovery could weaken further.
The 30 blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) dropped 19.01 points, or 1.43 per cent last week to settle at 1,307.44, with falls in Sime Darby (-32 sen), IOI Corp (-14 sen), Genting Bhd (-18 sen) and Genting Malaysia (-16 sen) contributing to half of the index's loss for the week. Average daily trading volume dwindled to 604.8 million shares with average value at RM964.5 million, compared with 719.2 million shares and RM1.15 billion in the previous week.
The expected window-dressing activities were visibly absent last week as market worries over signs of slowing global economic growth overwhelmed such hopes. It will not be any different this week, what with the handful of economic data released last Friday painting a dull picture for second-half 2010 and numbers that will be released this week likely to affirm the view.
On the local front, the growth in exports for May moderated to 21.9 per cent year-on-year to RM52.3 billion from 26.6 per cent year-on-year a month earlier. Lower shipments to European Union, China and the US were the main reason for the number to fall short of consensus expectation of 26.6 per cent. Exports to these destinations shrank 7.4 per cent, 2.5 per cent and 1.5 per cent month-on-month and recent developments in those economies indicate possibilities of further softening in the months ahead.
On the international front, the US factory orders data for May that was announced last Friday showed a 1.4 per cent contraction, which was higher than median forecast of a 0.5 per cent decline, and lower than a 1.0 per cent increase in April. This mirrored a decline in Japan's industrial and household spending and higher unemployment rate in May.
While a decline of 125,000 in the US non-farm payrolls numbers for June that was announced on the same day was less than expected 130,000, a little wide of the mark expansion in private payrolls of 110,000 would undermine market sentiment as it fell short of market expectation by 24.6 per cent.
Elsewhere, a fall in China's Purchasing Managers' Index for a second month in June would not help ease worries about a slowing global economy and a potential double-dip in the US and European economies.
For the week, investors will be watching closely the Institute for Supply Management's index of non-manufacturing businesses that will be released tomorrow for market direction. Global equity markets are likely to take a beating if the deterioration comes wider than expected. Domestically, the industrial production and manufacturing sales numbers for May that will be released on Thursday are likely to underperform expectations, in line with the trade figures. Investors will watch closely the Malaysian central bank's decision on the Overnight Policy Rate on the same day as well. While consensus expectations are for an increase, this column believes Bank Negara Malaysia will not rock the boat by raising rates in July.
As for the second-half 2010 outlook, upside potential for the FBM KLCI appears limited now and the noise levels from the external front have the capability to drag the benchmark index below 1,200 in the third quarter before buying interest emerges again to push the index higher to 1,250 by year-end, based on a 12-month rolling price-to-earnings ratio (PER) of 13.7x. For reference, the benchmark index is trading at FY11 PER of 13.4x, which is expensive compared to average regional PER of 11.2x.
In view of the global economic uncertainty and volatility, and drive from the government to cut subsidies, increase domestic demand and boosting service sector, it is wise to adopt the following investment strategy for the second half.
Stick to low-beta defensive picks that pay good dividends while having high domestic exposure. Preferred picks are PLUS and Tenaga. Increase exposure in small- to mid-cap plays that have a sound business model, long-term contracts, high recurring earnings and good management. Recommended picks are Supermax, Tanjung Offshore and QL Resources. Buy on weakness cyclical plays and blue chips that will benefit from the economic recovery and improved market sentiment when the dust settles. Preferred picks are CIMB, Public Bank, RHB Capital, Axiata and Genting Bhd.
Technical outlook
New spot month July FBM KLCI futures contract traded on Bursa Malaysia Derivatives lost 19.5 points or 1.5 per cent for the week to end last Friday at 1,305.5, slipping to a 1.94-point discount to the cash index, compared with the 1.45-point discount the previous Friday. Short-selling activity picked up momentum as traders anticipate further weakness ahead.
The local stock market ended weaker last Monday on profit-taking consolidation, pressured lower by lingering concern over the global economy after the G20 meeting failed to convince investors of the sustainability of the global economic recovery. The FBM KLCI inched down by 0.91 points to close at 1,324.54. Stocks ended lower on profit-taking the next day, dragged down by regional weakness following a downward revision of China's leading economic index for April which fuelled concern over slowing growth. The index lost 5.7 points to close at 1,319.84 for the day.
The local market extended losses on Wednesday as weaker economic data from China and the US raised concerns over a slowing global recovery, but first-half window-dressing lifted stocks to settle off lows. The FBM KLCI closed down 5.82 points at 1,314.02, off an earlier low of 1,306. However, losses extended into a fourth straight day on Thursday, after a possible credit ratings downgrade of Spain by Moody's Investors Service and further slowdown in China's manufacturing growth raised concern of a global economic slowdown, depressing regional sentiment. The benchmark lost 5.26 points to settle at 1,308.76.
Sentiment remained soft ahead of the weekend, following sustained weakness on Wall Street as weaker US manufacturing and home sales data raised concerns over a deteriorating economic recovery. The index eventually eased 1.32 points to settle at 1,307.44, with most investors staying on the sidelines pending the release of the closely watched US unemployment data.
The trading range last week expanded to 27 points from the 16.79-point range the previous week.
The daily slow stochastics indicator for the FBM KLCI has now entered the initial oversold region following last week's five-day straight decline, but the weekly indicator continued to extend higher towards the overbought area. However, the 14-day Relative Strength Index (RSI) registered a weaker reading of 47.69, while the 14-week RSI re-hooked downwards to read 53.76.
Meantime, a fresh sell signal was flashed on the daily Moving Average Convergence Divergence (MACD) trend indicator, an immediate bearish sign which is reinforced by the weekly MACD signal line which resumed its decline given the overbearing bearish market momentum. The +DI and -DI lines on the 14-day Directional Movement Index (DMI) indicator have crossed for a fresh sell signal, signalling further potential weakness this week.
Conclusion
Fresh sell signals on the daily MACD and DMI trend indicators suggest further downside bias this week, with deteriorating investor sentiment given the outlook for weaker economic growth for the second half of this year likely to discourage investors from increasing buying commitments.
Moreover, with the FBM KLCI closing below 1,309 last Friday, which is the 100-day moving average and 61.8 per cent Fibonacci Retracement (FR) of the sell-off from the 1,349 peak of May 4 to the 1,243 trough of May 27, downside risk towards better supports seen at 1,297, the 50 per cent FR, and then the 38.2 per cent FR at 1,284, is enhanced. Immediate resistance is at 1,320, with stronger hurdle at 1,335, and next at the May 4 peak of 1,349.92.
As such, investors are advised to continue adopting a mostly take profit and sell-on-strength strategy this week, given the strong likelihood for further downward correction ahead. However, chart-wise, buy blue chips such as Genting Bhd and Tenaga on any dips, while in the lower liner space, Adventa, Latexx, Supermax, Dialog and 3A Resources are good candidates to rebound from recent losses.
The subject above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.
- by Business Times
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