Caution - tariffs ahead

AFTER the tariff row induced sub-1,400 point lows in the FBM KLCI in early April, the dust is now settling, but no one is about to rush in and do anything brash.

All eyes continue to be closely focused on how global trade talks with the United States are progressing, with some degree of profit-taking apparent in the week.

Some investors were willing to wait it out on the sidelines for a clearer picture to emerge from these trade talks before deciding on further moves.

While expectations here were more optimistic before this, the US Treasury secretary Scott Bessent’s comments on Monday that it will take a more aggressive tone in trade talks appear to have sent stocks lower as the week progressed.

He says the United States will impose the maximum tariffs it has threatened against countries that do not negotiate “in good faith” and that tariff rates would go back to the levels that was initially announced on Liberation Day in April.

At home, investors are willing to sell at any slightest sign of weakness as the corporate earnings for the first quarter of 2025 (1Q25) were announced.

This was evident in the price patterns of some FBM KLCI index constituents including Public Bank Bhd and Petronas Chemicals Group Bhd (PetChem).

Despite coming in within expectations of most analysts and posting a 1Q25 profit year-on-year growth of 5.6%, investors chose to focus on the negatives instead and Public Bank shares closed by some 2.5% lower a day after its results were announced.

This was also seen in another consumer stock on the FBM KLCI – MR DIY Group (M) Bhd.

MR DIY had on May 5 announced its 1Q25 core net profit, posting a 21.2% year-on-year rise and meeting analysts’ expectations.

However, the stock succumbed to profit-taking in the past week.The gains in its share price due to the strong profit showing were quickly erased.

CIMB Research had a rather bearish take on corporate earnings in its note on May 20.

“An early peek into the 1Q25 earnings reporting season reveals a disappointing performance, with only 4% of companies beating expectations and a significant 33% reporting results below forecasts.

“The weakness was broad-based, led by the technology, oil and gas, automotive, and non-bank financial sectors,” it says.

Preliminary estimates by the research house suggest that earnings downgrades in the banking sector and PetChem could reduce FBM KLCI’s earnings growth to 3.8% to 6.8% for financial year 2025 (FY25) and FY26.

CIMB Research adds that this may result in an 81-point downside to its current FBM KLCI target of 1,657 points in the near-term should earnings disappointments persist.

But fund managers believe that trade talks will continue to be the bigger factor than corporate earnings in dictating the direction in which way share prices will go – especially for an export-oriented economy like Malaysia.

Asset management company Tradeview Capital’s founder and chief executive officer Ng Zhu Hann says Bursa Malaysia appears to show weakness on the slightest signs of any setbacks in the trade talks.

“The current situation will continue to cause the market to be jittery – foreign funds which were returning prior to this have sold some in the past week. The pullback in the FBM KLCI is normal and is to be expected,” Ng tells StarBiz 7.

“This was compounded by news in the week that the United States signalled it was willing to take a new toughened stance to trade talks,” he adds.

Ng also notes that the rise in US 30-year Treasury yields above 5% could drain more liquidity from the equity markets.

“Japanese bond yields have also risen of late. What this means is that the risk free rates are now very expensive.

“It also means that investors don’t need to take risks and can get returns by buying Treasuries,” Ng says.

The Japan 30-year Treasury yield was at 3.189% at the time of writing.

The rise in US Treasury yields appears to have followed Moody’s downgrade of the US credit rating from its top triple-A level to Aa1, citing rising government debt and a widening budget deficit.

Commenting on this matter, Ng says the Moody’s downgrade was long overdue, noting that S&P and Fitch Ratings had already announced their downgrades earlier.

“The main issue has always been about fund flows and this will tell me whether market goes up or down.

“This is a normalisation from the rebound earlier. I don’t think the market will fall below 1,400 points again,” Ng says.

“Our year-end target for the FBM KLCI is still 1,650 and in the near term maybe it will not be above 1,600 for the time being, but the long-term target is still there.

“For us in Malaysia, we also have to show that GDP growth is fundamentally sound. Those festering issues warrant the type of selldown that was seen in the last few days,” he adds.