The World Health Organisation (WHO) has declared COVID-19 as a global pandemic, given how far the coronavirus has spread and its devastating global impacts. The last time WHO used the word pandemic was in 2009, when a novel H1N1 strain of influenza swept across the globe. As at the time of writing, there are 169,610 confirmed COVID-19 cases throughout theworld, with 6,518 deaths,and 77,776 recovered*.
The virus’s spread has resulted in investors analysing the downside scenarios, digesting the implications of disrupted supply chains, official containment measures, and spill overs from the real economy to financial markets. A decision by two of the world’s largest energy producers to increase levels of production, despite falling energy prices, has further unnerved investors. The increased uncertainty has led to financial market volatility last seen during the global financial crisis.
In an effort to help cushion the impact of the escalating coronavirus pandemic on global economy growth, the US Federal Reserve (Fed) has slashed rates back to near zero, restarted bond buying (also known as quantitative easing, QE) and ensure liquidity in dollar lending. The new fed funds rate will now be targeted at 0% to 0.25%, down from a previous target range of 1% to 1.25%. The quantitative easing will take the form of US$500bn of Treasury’s and US$200bn of agency-backed mortgage securities. The Fed also slashed the rate of emergency lending at the window for banks by 125bp to 0.25%, and lengthened the term of loans to 90 days.
After the Fed announce these emergency measures, equity indices futures extended their slide in early Sunday night trade, falling by their 5% daily limit. Futures on the Dow Jones Industrial Average (DJIA) fall by 4.55%, while S&P 500 futures fall by 4.78%. Nasdaq-100 futures on the other hand were 359.75 points lower at 7,541. The immediate negative reaction suggests that markets are already worrying on the possibility that the measures do not work, seeing the Fed has already offered almost everything it had to give,and underlines desire for fiscal action rather than monetary ones.
Back home, our newly-minted prime minister, Tan Sri Muhyiddin Yaasin had announced MYR20b Economic Stimulus Package (ESP) on 27 Feb 2020 to cushion the impact of COVID-19 on Malaysian growth. There is also now a stronger prospect of at least another 25bps-50bps cut in OPR, and potentially further reductions in the current 3.00% Statutory Reserve Requirement (SRR) as the current global financial market meltdown further deteriorated financial conditions. This is after 25bps OPR cut made in January and early March this year.
* as reported on worldometer website as at 4pm, March 16th,2020
For domestic equity market, as at the end of last week, the local benchmark FBMKLCI index (KLCI) closed at 1,344.75, its lowest level since September 2011, marking a new 8-year low. This level also meant that the domestic equity market has entered into a bear territory, defined as 20% fall from the previous peak. Besides due to COVID-19 pandemic, the domestic equity market is also plagued with uncertainties over continuity in government policies due to recent change in government, and steep fall in oil price as our country is still very much relianton oil, being a net exporter.
Over the medium term, we opine that the domestic equity market is unlikely to rebound convincingly out of the bearish region, as long as the COVID-19 outbreak is not contained and effectively disappears. However in the short-term, there are rooms for trading opportunities. Even though the market fell sharply over the last couple of days, the advance/decline ratio (A/D) was not as bearish as the 9th March’s A/D. The less bearish A/D likely suggests that the current sell down is potentially weakening and are bound may take place next.
In this regard, our actively-managed funds are seeing values emerging from oversold counters which fundamentals stay intact. The active funds also intentionally avoid index-related stocks to cushion the potential downside, except for glove counters which are expected to benefit from a structural increase in demand for its products. On the other hand, our quantitative-based global equity funds would have captured the volatility spike and have reacted and may react further by decreasing allocation in equity in favour of cash, if the model finds it appropriate. After all, its value proposition to unit holders is providing access to a diversified global equity exposure while managing the downside risk through daily cash rebalancing and risk management. Therefore we would like to call upon our unit holders to exercise calm and be assured that we at BIMB Investment are doing our best in riding this volatility, for the benefit of our unit holders.
May Allah ease our journey.
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