Government must look into reviving repatriation, conversion of foreign currency dominated export proceeds into Ringgit - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE local stock market roared back towards the end of the week following the lower than expected inflation numbers in the US as well as rising confidence that the Unity Government will do well in the upcoming state elections next month.

The benchmark KLCI Index ended the week at 1,412.09 points (34.42 points or +2.50%). Trading activity also picked up in tandem with the turn in sentiments to RM1.91 billion per day from RM1.53 billion per day last week most driven by the foreign institutional investors as they mostly picked up stocks in the banking and technology sectors.

The overall trading value for the week was just above the past 100-day average daily trading value of RM1.88 billion per day thanks to last Friday’s massive RM2.67 billion traded value.

In the bond market, bond yields fell back once again after surging in the past week as investors rushed back into bonds after the Consumer Price Index (CPI) and Producer Price Index (PPI) for June 2023 came in below consensus expectations.

CPI rose 0.2% on a month-on-month (m-o-m) and 3.0% on a year-on-year (y-o-y) basis while PPI rose by just 0.1% on both m-o-m and y-o-y basis respectively. The unexpected dip in inflation reignited hopes that the US Federal Reserve will end its interest rate cycle for the year and begin to start cutting rates in 2024.

The 10-year US Treasury (UST) yields gave up almost all of its gains last week as it fell by 23 basis points to 3.83% from 4.06% in the previous week and caused the total yield gains over the past 52 weeks to decline to 87 basis points.   

The UST 2-year yields similarly fell by 18 basis points to 4.77% from last Friday’s close of 4.95%. This extends the yield curve inversion between the UST 2-year and 10-year notes to exactly one full year with yield spreads have widening back to -94 basis points from -89 basis points last week.  

The 10-year MGS bond yield fell back by nine (9) basis points last week to 3.81% last Friday from 3.90% in the previous week. The yield spreads between both countries’ 10-year bonds continues to be in a negative carry position of -2 basis points from -16 basis points last week.    

ECONOMICS

The Asean+3 Macroeconomic Research Office (A+3) expects Malaysia’s economic growth to moderate to 4.2% in 2023 after registering a strong growth of 8.7% last year as Malaysia is a major manufacturing exporter and is facing headwinds from the weakening demand in Europe and the United States (US).

Nevertheless, A+3 expects the country’s economic growth to improve to 5.2% in 2024. In terms of inflation, A+3 said Malaysia has done well to control inflation which had declined to 2.8% in May from 3.3% in April 2023 and expects the overall inflation to decline further to 2.6% in 2024.

A+3 is of the view that Malaysia’s monetary policy should remain on hold as it thinks there is no reason to ease monetary policy until inflation does come down to its target.

The Department of Statistics Malaysia (DoSM) disclosed that the price index per unit of steel decreased between 0.6% and 2.3% on a month-on-month (m-o-m) basis in June 2023 for almost all areas of Peninsular Malaysia and Sabah.

The price index per unit of steel and metal sections also recorded a decrease of between 0.3% and 2.1% for all areas in Peninsular Malaysia, Sabah and Sarawak due price decreases in steel and iron ore at the global level.

However, DoSM said that cement continued to record price increases as it rose between 0.1% and 0.9% in June 2023 as compared to May 2023 (1.8% to 4.0%). The price index for a unit of timber has also increased between 2.3% and 4.0% in all areas of Peninsular Malaysia except in Johor and Selangor, Kuala Lumpur, Melaka, and Negeri Sembilan.

In Sabah and Sarawak, the prices remained unchanged. On an annual basis, the unit price index of cement for the period of June 2022 and June 2023 had recorded an increase between 2.4% and 17.5% for all areas in Peninsular Malaysia, Sabah, and Sarawak.

Meanwhile the unit price index of building materials in Peninsular Malaysia increased between 0.2% and 17.5% y-o-y for June 2023. The highest increase for areas in Peninsular Malaysia was cement in Kelantan and Terengganu (17.5%), followed by bricks and walls in Johor (17.4%) and cement in Pulau Pinang, Kedah, and Perlis (17.1%). 

Malaysia’s Industrial Production Index (IPI) rebounded back to 4.7% in May 2023 from -3.3% in the previous month.

The rebound was attributed mainly to the performance in the manufacturing sector which posted a +5.1% gain (April 2023: -3.0%), mining +2.9% (April 2023: -4.9%) and electricity +5.0% (April 2023: -2.0%).

The manufacturing sector’s performance was propelled by a +10.1% growth in domestic-oriented industries (April 2023: -2.1%), supported by the manufacturing of motor vehicles, trailers and semi-trailers (+16.4%), and fabricated metal products, except machinery and equipment (+11.9%).

Export-oriented industries grew by 2.8% (April 2023: -3.5%), due to a solid +13% increase in the manufacture of vegetable and animal oils and fats as well as a +5.9% growth in coke and refined petroleum products.

Performance of the mining sector came on the back of gains in both the crude oil & condensate index and the natural gas index by 0.6% and 4.5% respectively. On a year to date basis till May 2023, the IPI moderated to +2.0% from +4.1% for the same period in 2022.

CURRENCY

The Ringgit made significant gains against the majority of the major international currencies during the week as foreign institutional fund flows returned to both the local fixed income and equity markets.

The local currency clawed back a sizable amount of its recent losses against the US Dollar at RM4.5230/ USD1.00 (-14.40sen) and regained ground against the Singapore Dollar at RM3.4280 / SGD1.00 (-2.50sen) and the British Pound to RM5.9320 / GBP1.00 (-2.20sen). Meanwhile, the Japanese Yen and the Euro remained unchanged at RM3.30 /JPY100 and at RM5.0840 / EUR1.00 respectively.

MY OPINION

The KLCI Index finally woke up from its range bound slumber between 1,370 – 1,400 points as foreign flow flows helped it surge past the 1,400-point psychological barrier last week.

Nevertheless, we have to monitor the strength of the follow up buying support in the coming week through the level of traded value and volume to obtain confidence that the breakout can be sustained.

In light of the latest development, I adjust my KLCI Index trading range to between 1,400 -1,430 points for the coming week.  

The UST and MGS yields spreads continued to remain in negative territory for the second consecutive week despite the massive drop in UST yields last week.

However, we have noticed there had been large portfolio inflows into the MGS bond space despite the negative carry and this may continue on into the coming week as US Federal Reserve can choose to hold off raising rates at its upcoming FOMC meeting later this month.  

The Ringgit finally managed to reverse its recent losses last week thanks to the return of foreign institutional investors and traders which helped to prop both the equity and fixed income markets.

I also sincerely hope that the government will also revive some policies such as the repatriation and conversion of foreign currency denominated export proceeds into Ringgit.

With the surge in the Ringgit, I am tweaking my forecast on the US Dollar trading band at between RM4.47–RM4.57 in the coming week. – DagangNews.com

Manokaran Mottain has been an economist with a number of financial institutions and is now managing his own firm, Rising Success Consultancy Sdn Bhd and has been writing his economic analysis on a weekly basis in DagangNews.com since 2022      

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