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PETALING JAYA: The local bourse’s benchmark FTSE Bursa Malaysia KL Composite Index, which has risen 2.9% from March 4 when Bank Negara announced a 25-basis point hike in the overnight policy rate to close yesterday at 1,321.43 points, will start to retrace from April as the region’s central banks begin to normalise their respective monetary policies.

Analysts believe that with the lack of fundamentals to fuel the rally further, the market would start to see outflow of funds as soon as central banks in the region start to raise their benchmark policy rates, which could commence next month.

“The risk of retracement is there, we see it starting from April. This month is still okay but much also depends on when China starts to raise interest rates,” OSK Research Sdn Bhd research head Chris Eng told StarBiz.

Last week, China’s premier Wen Jiabao warned of a latent risk in the country’s banks in a speech to the National People’s Congress and has targeted a reduction of new loans by 22% this year to 7.5 trillion yuan to stop speculation in the property market.

Although there was no talk of monetary policy tightening in Wen’s speech, analysts believe the People’s Bank of China would start raising interest rates soon as the country’s inflation rate rose 2.7% in February from a year ago, according to data released by the National Bureau of Statistics yesterday.

“We think the market will be quite volatile over the next four months and will move between the 1,250 and 1,400-point level before stabilising around 1,300 points towards year-end and start another rally next year,” Eng said.

He said the current market rally was largely due to foreign interest in select plantation and banking stocks only, with the larger capitalised stocks in both industries seeing the most play.

“There is a risk of money flowing out in an environment where sentiments are still cautious,” Eng said.

UOB Kay Hian (M) Holdings Sdn Bhd research head Vincent Khoo said although Malaysia had a leg-up due to the rate hike, which put the spotlight on the ringgit, the rest of the region would eventually catch up.

He expects the market to retrace to the 1,230-point level eventually, beginning in the second quarter.

“The two factors that will impact the markets will be the continued rise in global inflation and growth momentum slowing down; we see this happening over the second and third quarters,” Khoo said.

India is also facing expectations of a rate hike as a recent decision to raise fuel prices has stoked inflation while Thailand could start normalising interest rates as inflation starts to rise and economic recovery gains momentum.

The Bank of Thailand’s monetary policy committee issued a statement yesterday saying that the central bank would continue to closely monitor inflation and economic developments, a statement viewed by analysts as preparing the market for an eventual rate hike.

Morgan Stanley Research’s Shweta Singh, Tan Deyi and Chetan Ahya said in a report dated March 10 that the Bank of Thailand’s monetary policy committee statement, which placed more emphasis on inflation and economic developments, put the country one step closer to a normalisation of interest rates.

They expect policy normalisation by central banks in the region to begin in the second quarter as the growth cycle slowly firmed up and the rate hikes would depend on how pre-emptive the central banks want to be.

source HERE