By Chan Quan Min
In summary, forecasts for the year 2014 promise more or less the same modest growth as the previous two years. One event to look out for next year: the US Federal Reserve’s decision on scaling back the long-standing quantitative easing (QE) programme.
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A mere two weeks away from the close of the year 2013 and the local stock market is standing on solid ground, having this year seen the FMB KLCI benchmark index breach the psychological barrier of 1,800 points.
At this point, it is perhaps safe to say the blue-chip index would end the year on a high note after making commendable gains from the start of the year.
The confident year-end finish seen in 2012, and this year, 2013 would likely be replicated next year in 2014, analysts at major research houses predict.
Analysts are calling a better outlook for global markets for 2014, premised upon global economic growth picking up decisively in 2014.
To get a handle on the outlook for the year to come, it is worth noting the federal government’s commitment to subsidy rationalisation and further afield, the US Federal Reserve commencing a much anticipated tapering of its quantitative easing policy.
Next year, 2014, promises to be another year of moderate returns and low market volatility, predicted UOB Kay Hian in a recently released market strategy report for the first-half of 2014.
“We expect 2014 to be fairly similar to 2013 in featuring modest returns and low trading volatility for the FBM KLCI, and still favouring small and mid cap stocks. Our assessment incorporates the view of another year of unexciting core corporate earnings growth, and risk premiums to stay relatively low,” said the brokerage firm’s research team in their report.
“Like in 2013, we expect market sentiment to be cautiously optimistic at the year-start, reflecting the general view that the market already trades at around its fair-value range… Nevertheless, ample domestic liquidity should ensure not only a good downside buffer, but also support an eventual market uptrend,” UOB Kay Hian’s research team added.
The research division of UOB Kay Hian conservatively pegged their end-2014 target for the FBM KLCI at 1,900 points.
The year that was
The hotly contested thirteenth general election in May this year was a turning point for the local stock market. Prior to the general election, the market was unresponsive to breakout rallies in key global markets on political uncertainty. Then, the dissolution of parliament in anticipation of the general election triggered a dip to a 1,632 point low.
As summarised in a TA Securities market strategy report, the simple majority win by the incumbent BN coalition in the thirteenth general election fuelled a sharp rally on the benchmark index to spike up to a peak at 1,826 points before profit-taking consolidation set in.
In the intervening period between the general election and a rally on optimism over the October Budget 2014 announcement, regional bourses saw a sell off sparked by a reversal of foreign portfolio funds back to the US on tapering fears.
Reverse fund flows resulted in the FBM KLCI sinking to a 1,660 point low. Following that, the market showed resilience in the optimism for long-awaited fiscal measures in Budget 2014, rising to a 1,822 point high.
Early December, the FMB KLCI surged to hit a record high of approximately 1,840 points, according to TA Securites’ summary, boosted by Tenaga Nasional’s re-rating on Bursa Malaysia after an electricity tariff hike of 15% was announced.
During the course of the year, the FBM KLCI grew approximately 8%, faring better than regional Southeast Asian bourses, many of which either saw slight declines or stagnated.
Bitter medicine of reforms
Prime Minister Najib Abdul Razak’s ongoing subsidy rationalisation drive may hurt the wallet, but the reforms are much needed and have been met with positive market response on Bursa Malaysia at every subsidy rationalisation or, depending on the perspective, price hike event, analysts said.
In Budget 2014, Najib cut the federal government’s yearly allocation for subsidies by 16%. The lower amount allocated to fulfil the government’s subsidy obligations roughly correspond to the September petrol hike, the elimination of subsidised sugar the day after the budget announcement and a electricity tariff hike to take place from Jan 1 next year.
The budgetary reforms and fiscal discipline measures introduced in Budget 2014 are a long-term positive for the stock market, Hong Leong Investment Bank (HLIB) Research found in their latest report.
“We believe that both the reduction in petrol and gas subsidies show that the government is serious and committed to reform and thus far, the actions taken shows the government’s will and capability to undertake painful corrective measures,” analysts at HLIB Research wrote.
The spectre of QE tapering
After this year’s false start, the scaling back of the US Federal Reserve’s bond-buying programme is almost certain to begin in 2014.
In June earlier this year, US markets nosedived several percentage points after US Federal Reserve chairman Ben Bernanke openly considered scaling back the long standing QE programme.
The almost instant, US markets nosedive, sent ripples to markets worldwide. The event was short-lived. In less than a month, Bernanke announced the US economy was not yet ready for QE tapering.
While it may seem logical to assume worldwide markets will react much the same when QE tapering commences next year, this thinking is flawed, analysts contend.
“We believe that investors should not fear the commencement of tapering as it means that (based on all previous comments by various members of the Feb, especially Bernanke) there will be higher certainty of growth,” said HLIB Research in a comprehensive report on next year’s outlook.
“This should benefit equity given that among the various investment classes, equity is by far still the best proxy to economic growth,” HLIB Research added.
In announcements, the Fed chairman Ben Bernanke has repeatedly maintained that tapering of the Fed’s QE policy is contingent upon US economic recovery.
Ben Bernanke
By statute the US Fed’s role is to maintain healthy unemployment and inflation data for the world’s largest economy. Hence, the actual commencement of QE tapering is in itself a signal that the Fed believes the US economy is revving up for growth.
Without a doubt, the commencement of QE tapering will set of some volatility in global markets. JF Apex Securities head of research Lim Chung Cheng foresees “tapering to occur as early as March whereby portfolio rebalancing could unsettle emerging markets.”
But he also adds that, “investors will finally recognise that positive economic indicators shown by the US which would prompt QE tapering is indeed good news for the equity market.
“Ultimately, the market will be propelled by fundamentals premised on the improving US economy and corporate earnings instead of addicted to liquidity, which can finally lead to asset bubbles.”
The world has now seen six years of cheap money, detailed a report in The Economist. According to the report, there is evidence that extended periods of high liquidity and low interest rates globally have lead to more risk-taking behaviour in the world’s top financial capitals.
There are many signs pointing to a more subdued market reaction to the start of QE tapering. The false start in June resulted in a knee-jerk event. But now that expectations of QE tapering have been built up, the market reaction to tapering is likely to be muted.
“Unlike the situation in July to August 2013 when the market fell 6.8% from peak-to-trough when fears of tapering effects were compounded by concerns over the twin deficits in Asian countries, we expect a less prominent knee-jerk reaction when the market revisits such concerns in 1Q14.
“We expect risk aversion to be less prominent as some of the initial effects have been discounted by higher interest rates in South Asia, and we expect growing domestic liquidity to provide fairly firm downside support,” UOB Kay Hian surmised.
From the looks of things, the local stock market appears to be well supported for next year barring any unanticipated adverse event.
Yesterday: The economy – A year in review and what to expect in 2014
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