KUALA LUMPUR: The FBM KLCI, the barometer of the Malaysian stock market, has headed south since the 14th general election in May 2018.

The prophets of gloom and doom have cautioned that a recession is around the corner due to the 10-year cycle after the financial crises of 1998 and 2008.

However, a recession technically only occurs if there are two consecutive quarters of negative growth. The finance ministry (MoF) has forecast a growth rate of 4.9% for Malaysia in 2019 supported by sound domestic demand.

Public expenditure is projected to record slower growth following initiatives taken by the government to review and reprioritise expenditure as well as lower capital spending by public corporations.

On the supply side, growth is expected to be driven by the services and manufacturing sectors. Accounting for about 55% of gross domestic product, the services sector has been projected to grow by 6.3% and 5.9% in 2018 and 2019 respectively.

So, how will this affect the local stock market?

“The direction of the stock market is very uncertain at this juncture due to developments in the global economy.

“If the impasse between China and the US ends on a positive note, it will provide a positive catalyst to the stock market. On the other hand, continued trade tensions between the two super powers will not augur well for the stock market,” Phua Lee Kerk, chief strategist at Phillip Mutual told FMT.

On the type of stocks that might do well, Phua said construction sector stocks appeared positive as the government had begun spending on this sector.

Asked if investors were comfortable with the Pakatan Harapan government and its navigation of the economy, he said many investors were still assessing the new government as there had been some flip-flops in its policy implementation.

Meanwhile, Pong Teng Siew, head of research at Inter Pacific Securities Sdn Bhd said: “Technically, we are still in 2018 as the fourth quarter 2018 results of corporations have not been released yet. Therefore, it would be difficult to make an assessment of 2019 movements as we would not be able to project the earnings of companies. I would advise investors to focus on blue chip stocks as small cap stocks lack trading liquidity.

“I see a further downtrend in the FBM KLCI to around 1,600 points in the first half of 2019,” he added. “My choice of sectors includes construction, plantations – as crude palm oil prices are rebounding – and consumer. My advice to investors would be to be patient as I foresee the second half of the year to be better.”

CIMB, in a research note published on Dec 18, said: “We project 2019 to be a challenging and volatile year for the equity market as corporates come to terms with the new policy and political landscape post-general election, as well as adjust to slower global growth, tighter monetary policies and the ongoing US-China trade tensions.

“We revise down our end-2019 KLCI target to 1,638 points from 1,674 points. We advise investors to stay in defensive sectors and quality names in 1H19 (first half of 2019) and look for trading opportunities in oversold stocks.

“Our top sector picks are rubber gloves, oil and gas, healthcare and insurance for 1H19. Our top three stock picks for 2019 are Dialog Group Bhd, Malaysian Pacific Industries Bhd and Westports Holdings Bhd. We project KLCI earnings to grow by 6% p.a. in 2019F and 2020F but caution that there could be downside risks to these earnings due to potential policy shifts and macro headwinds.”

The government’s ability to manage its debt, which stood at RM1.07 trillion as at June 2018, will also have a bearing on the stock market. Foreign net selling continued on the local bourse last month, with foreign investors having sold RM1 billion net worth of equities, making it nine months of foreign net sell in 2018.