Market is expected to continue consolidating - Manokaran

THE local stock market remained in consolidation mode through the week in the absence of any market moving catalysts.

As such, trading volume and value remained modest as investors continued to be cautious in the face of uncertainties to the economic outlook brought about by stubbornly high inflationary pressures.

Virtually all the major regional markets in the Asia Pacific region posted a relief rally last week with gains of between 0.3% - 5.7% following their sharp selloff in the first week of May 2022. The benchmark KLCI Index ended the week marginally higher at 1,549.12 points (+4.71 points or +0.30%).

Going forward, I am expecting the local stock market to continue consolidating in the absence of any major market moving catalysts as the next US Federal Reserve Open Market Committee meeting is to be held on 14-15 June 2022 while the next Bank Negara Monetary Policy Committee meeting will be on 5-6 July 2022.

With inflation remaining close to their 40-year highs in the US at 8.3% year-on-year in April 2022, stock markets across the world will continue to price in the effects of another potential 50 basis points increase in the Federal Funds Rate at the upcoming FOMC meeting in June 2022 as the US central bank continues its attempts to bring inflationary pressures in the US under control.

In the meantime, the short-term direction of the local stock market (till mid-June 2022) will generally be determined by specific industry or company news flow especially the release of 1Q22 results over the next two weeks. Investors will be taking cues from the performance of the company in the first quarter of 2022 and the management’s outlook for the rest of the year and possibly 2023.

The key support level for the KLCI remains unchanged at 1,500 points while the 1,600-point level will continue to be the psychological barrier that the market will head towards in the event of a rebound.       

Meanwhile, Malaysia’s bond market also experienced a broad-based relief rebound as the yields for both the Malaysian Government Securities (MGS) and US Treasuries narrowed back slightly in response to the fact that the US Federal Reserve is not considering to raise interest rate hikes by 75 basis points at its upcoming meeting in June 2022.

Bond yields for both the 10-year US Treasuries (UST) and 10-year MGS yields eased slightly over the past week to 2.84% and 4.32% as at 20 May 2022. The latest yield spreads between both countries’ 10-year bonds continue to narrow further to 148 basis points from 154 basis points last week.  

ECONOMY

CBRE expects the hotel & hospitality sector to improve in the second half of 2022 on the back of increased visitor arrivals with the re-opening of international borders and pent-up leisure demand.

However, it cautioned that a recovery in gross operating profits lags behind revenue recovery by around two years and that consumer will gravitate towards established brands that they trust and are familiar with due to hygienic and service quality factors.

CBRE also expects people (especially business travelers) to travel less frequently in the near year but they are likely to stay longer hence negating any major increase in hotel demand. Nevertheless, full recovery for the sector will be delayed until tourists from mainland China return in full force.      

Senior Minister and International Trade and Industry Minister Datuk Seri Mohamed Azmin Ali said the government is currently working to introduce a suitable targeted fuel mechanism to cushion the impact of crude oil prices for the lower income group as especially when the projected fuel subsidy for the government is expected to rise of RM28 billion for 2022 as compared to RM11 billion in 2021.

In a separate development, he also disclosed that Malaysia had managed to attract RM16.52 billion worth of investments from the US and that all these committed investments can be finalized by the third quarter of 2002 to create employment opportunities for local citizens.

Among the companies that had committed to invest in Malaysia were Insulet, Ferrotec, Amazon Web Services, Cue Health, Texas Instruments and Boston Scientific.  

The Malaysian Automotive Association (MAA) disclosed that the total industry volume for new vehicle sales in April 2022 came in at 56,213 units which is 3.63% lower than April 2021 (58,329 units) and 23% lower than March 2002 (73,222 units) due to shipment delays, a shortage of chips and components. 

CURRENCY

As expected, the Ringgit’s volatility against the US Dollar tapered off last week after four consecutive weeks of declines against the greenback as portfolio outflows from the bond market stabilized as I believe the fixed income fund managers completed their most of their portfolio rebalancing exercises for their US denominated funds in response to the acceleration of interest rate hikes by central banks to combat inflation in the coming months.

In a aggressive rising interest rate environment, investors will usually find it more attractive to hold US denominated assets in anticipation of rising yields.

Unsurprisingly, the local currency was relatively stable over the week against the US Dollar to end the week a just shade higher at RM4.3870 / USD1.00 from RM4.3900 last week. In the light of the latest currency trading conditions, I am maintaining view for the Ringgit in the coming week to remain between RM4.36 to RM4.42.        

However, the Ringgit weakened against all the major currencies such as the British Pound, Japanese Yen, Euro and Singapore Dollar at RM5.4819 / GBP1.00, RM3.4280 / JPY100, RM4.6349 / EUR1.00 and RM3.1791 / SGD1.00 respectively.  

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POLITICS

Perikatan Nasional (PN) Chairman Tan Sri Muhyiddin Yassin said the PN coalition supports the proposal for an early distribution of electoral seat allocation among its component parties in preparation for the 15th General Elections. However, the matter has yet to be discussed at the PN supreme council at the moment.

Meanwhile DAP secretary general Anthony Loke said DAP is not involved in any discussions with non-Pakatan Harapan (PH) parties. He said DAP and PH’s current focus is to strengthen themselves to defend their seats and states under PH administration (Selangor, Negeri Sembilan and Penang) for the upcoming GE15.  – DagangNews.com

Manokaran Mottain has been an economist with a number of financial institutions is now managing his own firm, Rising Success Consultancy Sdn Bhd