This article first appeared in The Edge Financial Daily, on January 27, 2016.

KUALA LUMPUR: Investors are keeping their eyes open for clues about the government’s direction in the recalibrated Budget 2016, which will be announced tomorrow, analysts said, as it would have a bearing on the stock market’s performance this week. 

The FBM KLCI bucked the regional trend to finish higher yesterday, gaining 0.09% or 1.45 points to 1,626.66. 

JF Apex Securities analyst Lee Chung Cheng said the local stock market did not react to the news that Prime Minister Datuk Seri Najib Razak was cleared of any criminal wrongdoing over the RM2.6 billion donation and issues surrounding SRC International Sdn Bhd.

Rather, investors are keenly awaiting the announcement of the revised Budget 2016, which will dictate the market’s performance going forward. “Highly watched will be whether the government will stick to the 3.1% budget deficit target [for 2016],” Lee told The Edge Financial Daily.

Nevertheless, Lee expects the revised budget will have a limited impact on the KLCI’s performance, with external factors playing a primary role in determining the course of the market over the short trading week. 

He said the week may not bode well for the KLCI with oil prices still hovering below the US$30 (RM129) per barrel mark, expecting the support level for the benchmark index at 1,600 points. 

RHB Research Institute head of research Lim Chee Sing expects the government to keep its fiscal deficit target of 3.1% of gross domestic product, coupled with optimisation of operating expenditure and revenue boosting measures. 

“Optimisation of operating expenditures means that you cut expenditure that can be deferred without affecting economic growth significantly, like deferring some of the maintenance projects without affecting operations, cut participation in foreign fairs or foreign trips for civil servants,” he said. 

“Revenue-boosting measures include asking government-linked companies that have the capacity to dish out more dividends, such as what Khazanah [Nasional Bhd] did recently, diversify non-core assets or even raise sin taxes for [the] gaming sector and alcoholic beverages,” he added. 

Lim concurs that external factors will continue to weigh down the KLCI, especially with the tumultuous Chinese markets and low crude oil prices. 

He said Moody’s had already downgraded its forecast of crude oil prices lower to US$33 per barrel from its earlier projection of US$43 per barrel for 2016, which may affect the firm’s ratings of several Malaysian oil and gas firms.

Najib is expected to present a revised Budget 2016, now that oil prices have slipped below the US$30 per barrel mark. The budget was based on a crude oil assumption of US$48 per barrel. 

A head of research at a local firm, who requested anonymity, said the KLCI is likely to chart a rebound during this short trading week, but that will largely depend on external factors. “Technically speaking, the local market is slightly at the oversold stage. That’s why we say a rebound is likely, but largely depends on the external market. Attention is not so much on domestic factors,” he added.