War Could Increase Risk Premiums


If the Israel-Hamas conflict intensifies and turns into a full-fledged proxy war between a number of nations, the risk premium of the global market, including Malaysia, would increase.

According to observers, the weekend attack on Israel by the Palestinian militant group Hamas has already sparked a strong response in the world’s stock, bond, and commodity markets.

The benchmark Tel Aviv Stock Exchange 35 index for Israel fell 7%, sending stock markets throughout the Middle East into a sea of crimson.

Based on their current futures prices, the Dow Jones Industrial Average and Nasdaq are expected to open on Monday with losses of 0.6% to 0.7%, respectively.

According to Kenanga Research, the price of Brent crude oil futures has increased by more than 4% to US$88 per barrel, while the yield on the US 10-year Treasury note has decreased by 7.0 basis points to 4.72 percent due to investors’ flight to safety.

The new occurrence may cause more volatility if it persists, according to Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid, even though its risk aspects are difficult to define at this time.

“Right away, considering the proximity of the conflict area and the oil-producing nations, it might have an effect on crude oil prices. So this could lead to an increase in inflation, and it will be interesting to see how the main central banks, especially the US Federal Reserve, react to it, he told Business Times.

The “risk-off mode” may also cause the ringgit to continue to decline.

Market participants will therefore watch how the tension develops in the near future, particularly how the G7 nations respond. According to Afzanizam, the episode will probably lead to an uneasy market attitude.

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While Israel and Palestine are not large producers of oil or other important commodities, according to Kenanga Research, they are practically on the doorstep of the Middle East, which is a significant oil producing region in the globe.

The company believes that a military escalation might eventually obstruct oil production or exportation from the region.

“In any case, the perception of a heightened geo-political tension itself is sufficient to keep oil prices high, adding inflationary pressure to the global economy.”

Given that the fight is still in progress, Kenanga Research has for the time being kept its FBM KLCI earnings estimates and end-2023 target of 1,520 points.

“Assuming we cut our target price-earnings (PER) for FBM KLCI by 0.5 times to 16 times (from 16.5 times we currently apply), our year-end target will fall to 1,470 points (from 1,520 points currently).”Our end-FBM KLCI objective would decrease to 1,425 points if we were to reduce our target PER by a full multiple.

Kenanga Research has chosen banks as a proxy for an economy that will be more stable in the long run and have higher fiscal sustainability supported by targeted fuel subsidies. To some extent, banks also serve as a proxy for the multiplier impact that will occur when large-scale public infrastructure projects are implemented.

“We are now even more upbeat on contractors given the impending rollout of mega projects such as Mass Rapid Transit 3, Bayan Lepas Light Rail transit and various large-scale flood mitigation projects.”Given that telecoms services have developed into a fundamental requirement of modern life and that their earnings are resilient against targeted fuel subsidies, we like telcos.

Given that a portion of the M40 group is expected to lose access to gasoline subsidies, the firm is wary of mid-market retailers and car makers/distributors because a higher fuel price will reduce the disposable incomes of its target customers, such as the M40 group.

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