PETALING JAYA: The war between Israel and Hamas in the Middle East has significantly raised the risk premium in global oil prices, particularly for Brent.
According to TA Research, in the unlikely event of the war escalating and spreading to the broader Gulf region, Brent crude oil price could breach the US$150 per barrel level.
However, the brokerage said its view was that the conflict would be contained.
As such, it maintained its Brent crude oil price assumption at US$83.50 per barrel for 2023 and US$85 per barrel for 2024.
In its thematic report yesterday, TA Research noted that Malaysia, as a significant oil-producing and exporting country, could benefit from rising commodity prices. “For every US$1 rise in oil prices, Malaysia can bolster its revenue by an additional RM320mil,” the brokerage projected, noting this calculation only took into account the petroleum income tax and petroleum royalties variables.
“When we introduce another factor, namely the dividend from Petroliam Nasional Bhd (PETRONAS), the potential additional revenue from each US$1 increase in Brent prices escalates to nearly RM650mil,” it explained.
It added that with an assumption of every US$1 increase in Brent resulting in additional allocation of subsidies by nearly RM600mil, an uptick in Brent prices had the potential to yield a surplus for the government, contingent upon the inclusion of PETRONAS dividend.
“Rising oil prices not only boost government revenue but also profoundly affect Malaysia’s fiscal position,” TA Research said.
“The additional income generated from oil-related activities allows the government to reduce budget deficits, invest in economic development and strengthen the country’s financial stability.
“This, in turn, will lead to a more robust and resilient economy,” it added.
As for the impact on the local bourse, TA Research said the effects of war and terrorism-linked events on FBM KLCI were “short-term in nature”.
Among the major experiences it cited were the Sept 11, 2001 attack on the United States and the subsequent US invasion of Afghanistan, the US invasion of Iraq in 2003, the Russian annexation of Crimea from Ukraine in 2014, and the Russian invasion of Ukraine in 2022.
“If the Israel-Hamas war is contained, we believe the initial knee-jerk downside movements in the FBM KLCI will be limited to between 2% and 5%, with the June 9, 2023, low of 1,369.41 acting as a strong support,” TA Research said.
“Sentiment could improve post ground attacks assuming Israel will be more willing to participate in the peace talks after silencing Hamas,” it added.
In such a scenario, it said, any correction in the FBM KLCI would provide a good opportunity to buy, as the benchmark index is currently trading at an undemanding consensus 13.1 times 2024 price-earnings ratio and 1.2 times price-to-book value (PBV).
TA Research said with ringgit expected to strengthen against the US dollar next year due to possible cuts in the US interest rates and a likely increase in the foreign shareholding, which is only at 19.5% currently, it recommended “buy-on-weakness” into the following specific themes: undervalued blue chips, defensive plays, digitalisation, domestic infrastructure and property, power and utilities as well as oil and gas.
Conversely, if the Israel-Hamas war could not be contained, the index correction could be steeper and prolonged for a few months as transpired during the Sept 11 attack.
“In such a situation, the ‘bottom’ is anybody’s guess, as it will depend mainly on what occurs during that period. If it mirrors the plunge during the Sept 11 attack, the March 2020 low of 1,207.80 is expected to act as a very strong support,” TA Research said.
“Bear in mind that was the low we witnessed when the whole world came to a standstill because of Covid-19. Thus, it should be a tough nut to crack with the current low foreign shareholding of 19.5%, minimising the possibility of a drag from foreign selling,” it added.
Besides, at this level, the FBM KLCI would be trading at a very attractive one-time multiple to 2024 PBV.
Meanwhile, the brokerage noted that the impact of the Israel-Hamas war on Malaysia’s trade would likely remain minimal, as the nation’s most substantial trading partners, such as China and Singapore, were not directly involved, while the trade volume between Malaysia, Palestine and Israel was insignificant.