As we wait for the post-GE14 dust to settle, the FBMKLCI is currently in a range-bound position (i.e “directionless”):
Whilst KLCI trend may appear to be directionless, the yield spread between earnings yield of KLCI and 10Y MGS signals a different story. A narrowing spread between earnings yield and government bond yield may indicate that the equity market is possibly in an overvalued position. Unless the earnings growth in KLCI can outpace the increase in domestic bond yield, we may potentially see a future reversal in KLCI as yield-seeking investors may re-balance their portfolio from equity to debt.
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