NOTWITHSTANDING the Covid-19 pandemic, global markets have been stable in the first half in anticipation of stronger growth ahead. However, given the current conditions, analysts are more cautious about Bursa Malaysia’s prospects in the second half as, while they expect the bourse to eke out some gains, it will come on the back of volatility.

In the developed economies, earnings expectations are stronger compared to Asia and the emerging markets, which explains why the US and European markets have performed relatively better so far this year.

In the region, Malaysia has underperformed its peers as the benchmark FBM KLCI is trading 4.2% lower since early this year.

Research heads contacted by The Edge are not entirely ebullient about the local market outlook moving into the second half.

MIDF Amanah Investment Bank Bhd research head Imran Yassin Yusof, for one, expects range-bound trading to continue, at least into 3Q with a slight pickup in momentum in 4Q.

“We are maintaining the year-end target for the FBM KLCI at 1,700 points, driven by the reopening of the economy and herd immunity. We expect pent-up demand by then,” Imran tells The Edge. The benchmark index closed at 1,560 last Friday.

Imran also does not expect corporate earnings to be much affected, MCO 3.0 notwithstanding, as a lot of sectors are allowed to operate. His top picks for the second half include RHB Bank Bhd, Public Bank Bhd, MBM Resources Bhd, Sunway Construction Group Bhd, Hock Seng Lee Bhd, Dialog Group Bhd and Gas Malaysia Bhd.

Kenanga Research head Koh Huat Soon expressed similar sentiments. “The market will be volatile. Not to say I am bearish — we will still see a gain from where we are, but (it’s) just that the path will be volatile due to various concerns, such as the US Fed tapering and the state of the Malaysian government’s finances.

“However, on the ground, there is a better chance of recovery despite talks of the Delta variant. At the same time, Malaysia’s exports will continue to do well. We are also looking at the digital payment space.”

PublicInvest Research in a recent report observes that the market is still a trading-oriented one, more so with the ongoing pandemic and the ever-present possibility of new mutations and waves of infections causing longer-lasting damage, to which governments and central banks may find it harder to defend against given the weakened fiscal positions.

“Volatile swings are to be expected, but which will [then] present selective opportunities. Our 2021 year-end FBM KLCI closing is unchanged at 1,690 points.”

PublicInvest Research’s favourite picks are Dayang Enterprise Holdings Bhd, D&O Green Technologies Bhd, EcoWorld Development Group Bhd, Greatech Technology Bhd, Hibiscus Petroleum Bhd, Malayan Banking Bhd, Kawan Food Bhd, SKP Resources Bhd, Tenaga Nasional Bhd and Uzma Bhd.

Key risks ahead include:

1. US tapering

The hawkish stance adopted by the US Federal Reserve at a recent policy meeting spooked global equity markets. Back home, the FBM KLCI fell 29.37 points or 1.8% over the week to close at 1,559.68 points last Friday. But its decline was also in part because of internal political tussles.

While US Fed chair Jerome Powell assured that interest rates would not be raised too quickly based only on the fear of inflation, analysts warn that unexpected action could lead to market volatility.

“Our market will be affected as investors reprice the assets [when the tapering process starts]. But volatility will give good trading opportunity. There would be a level where investors will be enticed to come back to the market,” Imran opines.

Affin Hwang Asset Management Bhd managing director Datuk Teng Chee Wai is of the view that global inflation will be transitory in nature and not structural.

“The inflation trend that we are seeing globally seems to be transient as we have a low-base effect [from] last year. Rising commodity prices will also fit into the inflation data.

“If you look at the US, though core inflation is showing a big jump, but if food and oil are excluded, the number is not that scary,” he explains in a recent webinar on the market review and outlook.

Nonetheless, he says US interest rates have to normalise from 0% moving into 2022 and 2023, after which the markets are expected to respond in a volatile manner.

Teng expects markets to consolidate in the near term due to the lack of catalysts and already-high expectations.

Given the heightened volatility, Imran says it is not easy to gauge foreign fund direction, but net selling, if it arises, will not be excessive as their holdings are low after months of net selling. “This year, we have observed that at certain levels, foreigners did come in,” Imran observes.

In the week ended June 18, foreign investors turned net buyers after two weeks of net selling. But net inflow amounted to a mere RM75.68 million.

Touching on the US, UOB Research, in its Quarterly Global Outlook 3Q 2021 report, said that the first taper will be carried out in December 2021 and that the tapering process will last for nearly 1½ years until May 2023.

2. Persistent Covid-19 and slower-than-projected vaccination rates

The fight against the pandemic is far from over despite the availability of a number of Covid-19 vaccines. As positive cases remain numerous amid a slower-than-projected vaccination rollout, the World Bank recently cut Malaysia’s GDP growth forecast for the year to 4.5% from 6% earlier.

Inter-Pacific Securities head of research Victor Wan observes the current health crisis in Malaysia does not bode well for the economy, especially domestic spending, which has been badly damaged.

“Obviously, 2Q will not look good; it depends on how soon we can recover in 3Q. Though the economy could be better in 4Q, the overall market will still be choppy in the second half. Perhaps market stability will only emerge in 4Q when the vaccination programme is at an advanced level.”

Teng is concerned that the many different and more virulent Covid-19 variants may prolong the reopening of the domestic economy. “We have to live with Covid-19. With vaccination, the hospitalisation rate and the number of severe cases will decline, but people are worried about the variants.”

3. Increasing uncertainty on the political front and shaky government finances

Industry observers expect increasing political chaos in the second half on the back of growing calls for parliament to reconvene and an end to the state of emergency.

Last Friday, Dewan Rakyat Speaker Datuk Azhar Azizan Harun and Dewan Negara President Tan Sri Dr Rais Yatim proposed that a special sitting be held in early August to make the necessary amendments to Standing Orders to allow for the commencement of a hybrid parliament sitting by the first week of September, at the latest.

Moving into the last quarter, the tabling of Budget 2022 is likely to be another major test for Putrajaya, given considerable dissatisfaction over its handling of the pandemic.

“Budget 2022 will face the challenge of getting passed again this year, thus leading to rising political uncertainty,” predicts Kenanga’s Koh.

Last year, Budget 2021 was passed after Yang di-Pertuan Agong Al-Sultan Abdullah Ri’ayatuddin Al-Mustafa Billah Shah urged lawmakers to put a halt to the political tussles and to prioritise the welfare of the nation and people.

Koh is also concerned about the country’s rising debt-to-GDP ratio, which is close to 60%. The debt ceiling was raised to 60% from 55% for the period of August 2020 to end-2022 in a bid to bolster the government’s financial position and its ability to deal with the pandemic.

Wan opines that the return of the Goods and Services Tax (GST) has become more imminent given the country’s weak fiscal position. “It is anybody’s guess when the government will bring back GST. I suppose that will have the most impact.”

Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz had previously assured that the introduction of new taxes, including GST, was not a priority. But the ministry is undertaking a study to review the national tax regime and it remains to be seen what recommendations will come out of it as the government’s revenue stream could do with a hefty dose of injection.

4. Geopolitical noises

The rivalry between China and the world’s largest economies has intensified after the recent G7 meeting, as US President Joe Biden urged the G7 nations to compete with China.

At the same time, the G7 nations unveiled an infrastructure plan for the developing world to compete with China’s global initiatives.

Hitting back at the G7, China pointed out the days when “small” groups of countries decided the fate of the world was long gone.

Teng foresees more pressure ahead as developed nations deal with China’s tremendous growth. “I don’t think there will be an all-out war, but definitely more noises.”