Next global financial crisis may be nearer than you think

PETALING JAYA: As the global markets suffered a relentless slump with persistent panic selling, is the next global financial crisis not too far from us?

Affin Hwang Capital Research said while it might be too early to determine if the world is heading towards another financial crisis thanks to the black swan events of Covid-19 and the oil price war, the writing may already be on the wall given the downgrade in global gross domestic product (GDP) growth and the failure of monetary policy stimulus to allay market fears.

“Fears over a global economic slowdown have started to sink in as global equity markets start to ponder the negative impacts of production supply disruptions, lost man-hours and weaker consumption spending, especially as the virus outbreak has turned pandemic,” it said in a note yesterday.

Yesterday, the FBM KLCI fell below the 1,300-point psychological level, plum-meting as much as 66.27 points or 4.93% to 1,278.48 points. On Bursa close, it plunged 64.12 points or 4.77%. There were 1,041 losers against 97 gainers.

The ringgit weakened 0.44% to 4.3065 against US dollar as at 5pm yesterday.

The key index has contracted 31.3% from its recent high of 1,863.46 in 2018, which could attributed to several reasons including disappointing corporate earnings growth, uncompelling valuations and the recent change in government, while the Covid-19 outbreak and the oil price crisis just added to the pain.

“Notably, as the KLCI has corrected, we have seen the equity risk premium (ERP) correspondingly increase, though it is still not yet at alarming levels, as the ERP at current levels of 3.4% has previously spiked to as high as 7% during the global financial crisis and 11% during the Asian financial crisis,” it said.

It pointed out that its projection of GDP growth decelerating to 2.5% in Q1 20 from 3.6% in Q4 19, could be the precursor for a further de-rating of the market.

“Any further selldown in global equity markets will likely compound this problem.”

In terms of valuation, Affin Hwang pointed out that the current price-to-earnings ratio valuation of 14.1 times, is nowhere close to the -1SD (15.2 times) or -2SD (16 times) levels which it hit during the previous bear markets, but market expectations are potentially still too optimistic.

“We think that there is likely further downside for the KLCI should there be a further selldown in global equity markets. The sharper corrections in regional and global markets are also making the KLCI look relatively unattractive,” it said.

Affin Hwang has revised its year-end FBM KLCI target to 1,200 points, and slashed its corporate earnings forecast to -4.7% from 1.3%.

In view of the increased market volatility, the research house said it continued to advocate a defensive stance in healthcare and real estate investment trusts.

It also has downgraded its rating call on the plantation sector to neutral from overweight, while oil & gas and financial sectors have been downgraded to underweight from neutral.

“Our other downgrades to underweight include gaming, utilities, transport & logistics, building materials and EMS,” it said.

In tandem with these revisions, Affin Hwang has also added YTL Power International Bhd, Uchi Technologies and Taliworks Corp Bhd to its top buy list, as these three stocks offer dividend yields that are sustainable and compelling, ranging from 7.3% -8.4%.

source https://www.thesundaily.my/business/next-global-financial-crisis-may-be-nearer-than-you-think-KC2136914