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The Impact of Major Events on Financial Markets

Updated: Feb 28, 2020

Events in Malaysia, Asia and globally continue to affect financial markets. What is the visible impact seen? What should investors do?

Financial markets refer to any marketplace where trading occurs, including the forex market, bond market as well as the derivatives market. It is vital for the prolonged operation of capitalist economies.

The markets make it easy to trade financial holdings while creating securities products that provide a return for those who have excess funds (investors/lenders) and make these funds available to those who need additional money (borrowers).

The markets can be affected by certain factors such as political landscape, disaster and the outbreak of fatal infection.

Malaysia Political Landscape

The political uncertainty that has clouded Malaysia for some time is mainly fuelled by the reluctance by Prime Minister Tun Dr Mahathir Mohamad to step down in favour of Datuk Seri Anwar Ibrahim, as agreed to by all parties in the ruling Pakatan coalition before they won the general election in May 2018.

Starting last Friday night, several important meetings held by top leaders of Pakatan headed by Tun Dr. Mahathir Mohamad and on Monday, he officially resigned as the Prime Minister.

This turn of events affecting the financial markets in Malaysia in terms of:

Foreign investors might avoid investing in Malaysia Ringgit based assets.

The executive director of the Socio-economic Research Centre, Lee Heng Guie, told The Star, the last thing investors want to see is political turbulence when the government’s ability to deal with economic disruptions and uncertainty associated with China’s Covid-19 outbreak amid a slowing economic situation is being tested.

“The persistent uncertainty associated with an unstable political environment has undermined investor confidence, weakened consumer sentiment and reduced pace of economic development.

2. Panic selling on Bursa Malaysia

According to The Edge, the selling wiped out RM43.4 billion in market capitalization from Bursa in one day. There were 1,015 losers and 138 gainers, while 222 counters traded unchanged.

All indices on Bursa were also in negative territory; the worst hit was Bursa Malaysia

Construction Index, down 6.07% or 12.6 points to 194.81. Bursa Malaysia saw 4.03 billion shares, worth RM3.91 billion.

The ringgit also ended sharply lower against the US dollar in tandem with the local equity market, amid a domestic political realignment and the ongoing Covid-19 outbreak.

Covid-19 Global Outbreak

With the current Covid-19 outbreak, analysts generally believe that its impact on Malaysia’s economy as well as on tourism and production would likely lead to moderate growth in the near term.

According to Kenanga Investment Bank Berhad research house, the impact of the outbreak is seeping into the manufacturing sector and disrupting the global supply chain seen by factory shutdowns in China.

According to iFAST, the initial reaction of markets when the news broke out was negative, as the surge in numbers shook investors’ confidence in China’s ability to contain the virus and its impact on its domestic-reliant economy. Thankfully, the sharp surge in daily growth rate didn’t last. The latest daily growth rate is now at 2.6%.

There remains continued risks to markets as an increasing number of countries are affected by the outbreak. And in some countries the spread has been growing at an alarmingly fast rate.

Tourism Industry Hit

Chinese tourists make up a huge fraction of the global tourism market and in Malaysia,  China’s tourist remains one of its top 10 tourists.

Due to the temporary suspension of immigration facilities including China, the tourism industry is expected to be affected.

Based on past experience with the SARS outbreak, tourist arrivals in Malaysia from China fell by 37 percent while tourist arrivals generally fell 21 percent, leading to a decline of 39 percent and 17 percent in tourist spending.

Given that the Covid-19 outbreak is decidedly larger in scale, it is not unreasonable to suggest that it will be more than nine months before monthly international passenger traffic returns to the pre- Covid-2019 outbreak level.

US Presidential Elections

According to Chief Investment Strategist for BlackRock Canada, Kurt Reiman, rising uncertainty and a wide range of potential policy outcomes that weigh on sentiment and prevent a repeat of outperformance.

Investors may face the risk of more disruptions to the global system if trump is re-elected at the prospect of a Democratic administration raising corporate taxes and tightening regulations.

Fiscal stimulus, whether in green infrastructure or tax cuts, is possible if either party gains control of both the executive and legislative branches.

A big tech companies may face a regulatory backlash, whatever the election outcome- market dominance, data privacy, election meddling and cybersecurity rise to the fore.

Chief Investment Strategist of Manulife Investment, Philip Petursson added there are some factors to consider including which party achieves power in part of the government.

Gridlock tends to be good for markets, as it maintains the status quo and if Democrats take full control, the likely outcome would be a repeal of Trump’s tax cuts and potential weakness in the U.S economy from both business and the consumer side.

The ideological differences between a Democratic candidate and current US President, Donald Trump are making financial markets positioning and making bets. If Trump wins, stock selection will be in usual terms considering he is pro American dan pro-energy.

When you look back at the history of presidential election returns and inaugural year returns, at the year the US elects a Republican, the election year returns are above average and inaugural year returns are below average, but when the US elects a Democrat, the election year returns are below average and inaugural year returns are above average.

Founder and Chairman of Fisher Investments, Ken Fisher explained this probably because markets tend to think Republicans are pro-market and pro-growth when they are just politicians.

“But when a Democrat is elected, the market is scared, and then find out that market isn’t so bad because presidents don’t really have as much power as people think they do. However, we have a strong long-term conviction on where the best opportunities are in Asia.”

For him, these include stocks in sectors such as Chinese consumption, insurance, technology, real estate in Singapore and Indian private sector banks.

What Can Investors Do?

Keep calm and follow your plan.

In the short term, there’s often a knee jerk reaction in investors and markets reacting to news. It matters significantly if you’re investing short term but less so if you’re investing long term where corrections will in the larger context of things appear as a mere blip.

Investors should have and follow your own personal investment plan which should clearly spell out when to exit. In fact, your personal investment plan may be telling you that it’s a possibly time for entry with a buying opportunity as the company’s fundamentals have not changed while valuations are cheap.

For long term investing, one can opt to continue to hold, dollar cost average in, and pickup defensive/undervalued investments. For some investors fearful of a drop, they may opt to sell off hoping to reenter again but this hinges on one believing that one can time the market. Or another option would be to hedge some of your current positions.

Ideally and more importantly, as an investor should have your asset allocation in place. Having a good mix of asset allocation in different asset classes will help reduce the overall volatility and losses. For example, while equities prices in Malaysia/globally dipped, gold as a commodity has risen in prices. An ideal asset allocation across different types of investment assets, geographies and sectors would help your investment portfolio to deliver above average returns even during times of market turbulence.

Rafiq Hidayat, Wealth Vantage Advisory Managing Director shares on the impact of both the coronavirus epidemic and the current political situation on the financial market.

Share and discuss with us on the financial impact and investors response in troubling times.

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