If inflationary pressures remain persistent, interest rates may be raised faster than anticipated

By Manokaran Mottain

THE local stock market ended the week -0.87% lower at 1,512.22 points due to a combination of a lackluster 3Q21 corporate results and the emergence of a new COVID virus variant called B.1.1,529 or Omicron from South Africa which triggered a sell-off in the global equities market especially in the airlines and travel related stocks after it was detected in Belgium, Botswana, Israel and Hong Kong.

Investors are worried that a new international travel ban will be reimposed due to the variant which has over 30 mutations to its spike protein which may enhance its transmissibility and resistance to immunity provided by both vaccination and natural infection.

Countries in Europe have already banned incoming flights from South Africa and seven (7) other neighbouring countries – Botswana, Zimbabwe, Naminia, Lesotho, Eswatini, Mozambique and Malawi in an effort to prevent the virus variant from entering the region which is currently experiencing another sharp wave of Covid infections.  

Companies in the Plantation and the Oil & Gas sectors such as KLK, TSH Resources and Petronas Gas reported better than expected results.

However, companies in the Property, Gaming, Automobile and Construction Sectors reported results that were below consensus expectations.

Other companies in the banking & utilities sectors such as Maybank, Tenaga Nasional, Telekom Malaysia reported results that were in line with consensus expectations.

The KLCI is expected to be range bound between 1,500 – 1,515 points next week as investors await further news on Omicron variant of the virus and the release of the last batch of 3Q2021 corporate results from companies with quarterly financial periods ending on 30 September 2021.

The results released so far was not a surprise for the market due to movement control orders in place which limited economic activities during that period.

Economy

National Property Information Centre released data that the overhang in the residential property sector as at 3Q 2021 stood at 30,290 units valued at RM19,75 billion.

However, the volume and value of transactions have picked up in 3Q2021 from 2Q2021 by 3.8% and 38.8% respectively on a y-o-y basis.

Channel checks indicate that demand for residential properties priced below RM500,000 continue to remain strong in key areas – especially the Greater Klang Valley vicinity with property developers recording take up rates in excess of 60%.   

However, the immediate concern facing the country are the effects of inflation which has started to filter through the supply chain for consumer staples culminating in the sharp increases of vegetable prices.

Of concern are the prices of feedstock and fuel / transportation costs. We expect the fallout to cause the prices of other food products to rise in the coming months.

If the inflationary pressures remain persistent, this may force central banks across the world including Bank Negara to raise their interest rates faster than expected.

The US Federal Reserve (FOMC) will hold its last meeting for 2021 on 15 December 2021, while the European Central Bank and Bank of England will hold their meetings on 16 December 2021. The market does not expect any rate changes at the upcoming meetings. 

2022 is expected to be a better year for Malaysia as economic growth is supported by a robust resumption of economic activities following the uplifting of the movement control order.

The outlook for local equities is encouraging but the outlook for the local fixed income / bonds market remains uncertain due to the rise of inflationary pressures across the world exacerbated by the prices of commodities.

The local bond market is expected to post its first decline in over 10 years in 2021 in line with most of the ASEAN bond markets.

Currency

The Ringgit weakened significantly over the US Dollar last week to RM4.2370 / USD1.00 from RM4.1810 in the previous week as foreign investors begin to price in the possibility of the US Federal Reserve increasing the interest rates at a faster than expected pace in light of the steady recovery of its economy.

The Ringgit is expected to trade in a range of between RM4.20 to RM4.25 in the coming week as we expect the selling momentum to slow.  

Politics

On the political front, the resounding victory of Barisan Nasional in the Melaka State Elections showed that support is returning back to the government as the rakyat wants a solid-state government to focus on the welfare and economic well-being of the state. 

All eyes will be on the Sarawak State Elections on 18 December 2021 which was delayed due to the Covid epidemic. Both Barisan Nasional and Perikatan Nasional will not be participating to avoid three cornered fights for seats.

Gabungan Parti Sarawak is expected to perform well in the upcoming elections and indications are that they will successfully defend all of their existing 72 seats in the State Assembly and perhaps even pick up a few extra seats from the opposition.   – DagangNews.com