Bursa Malaysia, technology stocks under pressure

KUALA LUMPUR June 20 - Bursa Malaysia and technology stocks are expected to be under pressure in the near term following the US Federal Reserve's move to raise interest rates.

The move by the world's largest economy to raise interests, its highest in 14 years caused a "bloodbath" last week with all stock markets around the world "bleeding."

Prior to that, there were already warning signs when Bursa Malaysia dived to 1,464 points, its lowest in 20 months.

"Technology stocks tend to be affected the most as they are most sensitive to interest hikes and this will affect their bottom-line.

Rising interest rates tend to hurt growth stocks, and more specifically technology stocks due to their high price to earnings ratios and low dividend payments," US market trader Kamarul Ariff Abdul Karim told Dagangnews.

"Higher rates can slow down businesses' cash flows and stunt their reinvestment into innovation and growth prospects." said Kamarul who will soon launch his website IndexMasterClass.com. 

He added the era of easy money is over and investors do not like companies valued at billions of ringgit while losing billions at the same time. Investors do not like that anymore.

Also technology stocks are very vulnerable to interest rate hikes as it will affect bottom-line.

Investors now prefer energy stocks

The stock market will be challenging in the next few days or even weeks as it takes time to stanch inflation.

In the meantime, crude oil prices will remain volatile due to the Russia-Ukraine war and oil prices are not expected to dim below the US$100 per barrel level.

What caused the inflation?

It is clear that as long as the threat of inflation persists all over the world, the stock market will be under pressure.

There are various reasons which are contributing to this perfect storm.

When COVID-19 broke out, the US central bank reduced the interest rates to almost zero percent.

This is to bolster and stimulate an already weak economy.

When the pandemic started to recover, businesses thrived causing demand for products and services to increase amidst supplies shortages.

Manpower supplies did not return to pre-COVID-19 days such as in the country's hotel industry, of which businesses are picking up but the workers which left have not come back.

Another factor is that people are more comfortable to work from home, remote working and some people now prefer to work in the more flexible ride hailing or delivery industry. 

The current lockdown in China cut supplies of parts, consumer as well as industrial goods to export markets including Malaysia.

Inflationary fears could spook the market

The threat of rising inflation may dampen Bursa Malaysia as investors might pull out their money.

The Russia-Ukraine war made essential goods like grains and oil and gas becomes scarcer. 

Other factors include 9 major international shipping companies consolidating into three major alliances (cartel) that increased shipping costs up to 1,000 percent.

The consumer price index report released in June indicated that the Inflation rate in the US now is the highest in 40 years. 

"People are feeling the pain to pay for fuel at gas stations. Families are finding it more difficult to put food on the table despite having a job.

This is inflation. Even when you still have a job, you find it difficult to make ends meet," Kamarul Ariff told DagangNews.

He added on the other hand, recession is when the people cannot get jobs and when layoffs happen, industries shut down or down size.

Inflation plus recession would be disastrous

In order to bring down the inflation while trying not to cause recession, the US central bank, introduced a couple of measures like increasing the interest rate to 75 basis points which is the highest in 14 years.

Economists meanwhile expect the interest rates to increase further in July and September in addition to the start of the federal balance sheet tapering (which results to less liquidity in the stock market). 

Stock markets do not like this and this is why stock prices start to tumble with technology shares the most affected. 

What moves the market?

All these factors combined, it is affecting the world. 

This is a global crisis and an economic disaster in the making not only in the US or just Malaysia. It is a world problem.

Super difficult to control 

Even if the Russian-Ukraine war ends tomorrow, it will take time for stock marts to recover.

It will take time before economic sanctions are lifted in the warring countries and it will take more time before supplies are back to normal.

There are pockets of opportunities

However, Bursa Malaysia is still resilient and there could be opportunities in niche stocks such as companies undergoing merger and acquisition, initial public offerings or stake disposals.

Investors just have to be wary of the global economic developments and be alert with both local and external corporate news in order to make a killing. - DagangNews.com