This article first appeared in Capital, The Edge Malaysia Weekly on October 10, 2022 - October 16, 2022

THE turmoil at Credit Suisse Group arising from the spike in its default swaps has shaken the financial markets with the worry that it might be the Lehman Brothers of 2022.

Is this cause for concern for the global banking system, as October generally is a volatile month for global equities?

The Swiss bank’s CEO, ­Ulrich Körner, who just took office in late July, has reassured staff that it has a “strong capital base and liquidity position”, with a new strategic plan to be unveiled on Oct 27, Bloomberg reported. It is finalising plans that may see sweeping changes to its investment bank and the axing of thousands of jobs over a number of years.

Credit Suisse’s share price has taken a beating with a sharp fall of over 50% year to date to a record low, giving it to a market capitalisation of about 11 billion Swiss francs (RM51.8 billion).

Areca Capital Sdn Bhd CEO Danny Wong is confident that Credit Suisse’s woes are unlikely to create a contagion effect for the global financial markets, as the risk is very much contained to Europe if there is any outbreak from this development. He rules out the possibility of Credit Suisse becoming the next Lehman Brothers.

“There was a subprime issue during the Lehman Brothers period. But this time there isn’t one. It’s purely because people [are speculating about] Credit Suisse’s overexposure on the liquidity side. So I don’t think this time, [it] will cause a systemic risk,” he tells The Edge.

Inter-Pacific Securities head of research Victor Wan is of the view that global financial institutions have learnt a lesson from the Leh­man Brothers crash and the impact of Credit Suisse’s troubles is under control.

Meanwhile, Areca Capital’s Wong sees the potential call for a general election in the near term as positive news. “People are looking forward to stability and this will be the catalyst for the market.”

As we step into the last quarter of 2022, Wong is sanguine about the prospects in the next two months. “On a macro level, most market developments have already been priced in. Due to the US Federal Reserve’s hawkish stance, US inflation has been trending down in the past three months, coupled with the easing of commodity prices.”

Over in China, with Xi Jinping set to secure a third term as president at the upcoming Communist Party Congress this month, Wong hopes that the country’s zero-Covid policy could be relaxed. “If it happens, global markets will fly again,” he thinks.

The FBM KLCI has fallen 6.1% since early this month to close at 1,420.43 points, after gaining 1.3% in September. Despite October traditionally being a volatile month for global markets, the local benchmark index has performed better than its global peers during the month in the last decade, with gains in seven of the 10 years.

Nonetheless, one research head, who declined to be named, is concerned about the upcoming election risk. “When parliament is dissolved, there will be a period of anxiety among investors. If the outcome is weak, meaning no convincing majority, then the political scene will be unstable, giving rise to risk premium. This will make it hard for the local market to advance due to the uncertainty.

“If you had asked anybody six months ago, the answer (on the outcome) would be very certain judging from the results of the by-elections. But since the jailing of former prime minister Datuk Seri Najib Razak and the deterioration in the economic conditions, it has become hard to predict the general election outcome.”

As a result, he advocates defensive and yield strategies.

“Banking is one of the yield plays and local banks are still quite safe in terms of asset quality. Other industries in focus include consumer staples, utility and telco stocks.”

Given that Bank Negara Malaysia is expected to continue on the interest rate normalisation path, Wong remains positive on the banking sector. He highlights that growth stocks, such as technology, may come under the spotlight again as global central banks become less hawkish in response to a moderation in inflation growth.

“I would temporarily ignore electronic manufacturing services players because of their vulnerability. I prefer automated test equipment, and outsourced semiconductor assembly and test players,” he says.

Wong continues: “Despite the potential weakness in mobile chips, it will always be negated by demand for electric vehicles and Internet of Things. So, I’m still positive on our chip industry. Furthermore, the sales will be boosted by the weak ringgit.”

Wong adds that cash-rich glove companies are also worth a look after a heavy market sell-off in response to waning demand for gloves and production capacity cuts.

“Even glove companies make losses, it won’t affect their cash much, with the cash per share remaining high.”

Inter-Pacific Securities’ Wan expects some bargain-hunting activity following the oversold position in many stocks.

“There will be volatility but I don’t expect it to be that severe. Note that some tech stocks are trading at their rock-bottom prices. Although the tech outlook is getting more challenging, the growth will still be there.”

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