Investors turning more cautious as inflationary pressures proved stronger than expected - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE overall market especially the KLCI Index continued to be under pressure over the past week given the lackluster corporate results for 4Q2022.

The only major takeaway from the tabling of the revised Budget 2023 was the absence of the prosperity tax for large cap companies.

Other than that, the other proposals include the potential listing of dual class shares on Bursa Malaysia and the extension of tax exemption of up to RM1.5 million for the listing expenses incurred by companies listing on the ACE and LEAP markets of Bursa Malaysia till the year of assessment 2025.

I expect the market to be range bound in a +/-15 point range in the coming week with the release of corporate earnings for 4Q2022 being the key driver.  

The yield spreads between our local 10-year MGS yields and 10-year US Treasury Bills have actually turned into a negative carry and this puts the MGS bonds at a precarious price point given the fact that US Treasury Bills have a much higher sovereign rating.

This makes the MGS yields vulnerable to another sell off going forward especially when it nears the next FOMC meeting next month given the fact that the stubbornly high inflationary pressures will cause the US Federal Reserve to continue raising interest rates by another 50 basis points to 5.0% by the middle of the year and possibly even further if inflation is not brought down.

Hence, I am maintaining my view that the local MGS yields are likely to rise to the 4.00% level in the coming weeks.

The Ringgit performed as expected as the volatility against the other major currencies – especially the US Dollar has dipped significantly.

Going forward, I am maintaining my forecast for the Ringgit trading band between RM4.38 and RM4.48 against the US Dollar in the coming week as there are no major catalysts on the horizon to suggest any major movements in the near term.

Last week performance

The benchmark KLCI Index continued to retreat over the past week to close at 1,456.80 points (-20.10 points or -1.36%) as it faced continuous profit taking across the board due to lackluster corporate results and investors turning more cautious as inflationary pressures proved stronger than expected which pushed expectations of an interest rate pivot further back.

The average daily value traded rose slightly to RM2.18 billion from RM2.07 billion per day in the week before. This is around 10% above its past 100-day average daily trading value of RM1.98 billion.

In the bond market, US bond yields continued their rally after the US Commerce Department reported that the personal consumption expenditure price index (which excludes food and energy) for January 2023 rose 4.7% which was well ahead of consensus expectations of a 4.4% increase.

If food and energy components are added in, the index will rise further to 5.4%. In addition, the meeting minutes from the US Federal Reserve’s latest meeting indicated that while there were signs of inflation easing off, they were still concerned about rising prices and noted that more interest rate hikes may be required. 

Unsurprisingly, the yields of US Treasuries rose across the board in expectations of continued rate hikes by the US Federal Reserve. The 10-year US Treasury (UST) yields spiked by another 12 basis points last week to 3.94% from 3.82%. This increased the total yield gains over the past 26 weeks (or half year) to 90 basis points.   

The UST 2-year yields also spiked by 19 basis points to 4.81% from last Friday’s close of 4.62%. The yield curve inversion between the UST 2-year and 10-year notes entered into its 33rd consecutive week with yield spreads widening further by 7 basis point to -87 points from -80 basis points last week. The long-term average of the yield spread for both UST is +0.92% or +92 basis points. 

MGS bond yields generally held firm over the past week as the selling pressure from foreign institutional investors subsided. The 10-year MGS bond yields rose only by a single basis point to 3.93% last Friday. The latest result brings the yield spreads between both countries’ 10-year bonds to a negative one basis point from 10 basis points last week.  

ECONOMICS

Malaysia’s Consumer Price Index (CPI) for January 2023 dropped slightly to 3.7% year-on-year (y-o-y) from 3.8% in December 2022 while core inflation rose by 3.9% during the period.

The Department of Statistics Malaysia disclosed that inflation was driven by the following segments - restaurants & hotels (+6.8%), food and non-alcoholic beverages (+6.7%), transport (+4.0%), household maintenance (+3.5%), recreation services & culture (+2.7%), miscellaneous goods & services (+2.3%), health (+1.6%), housing, water, electricity gas and other fuels (+1.5%) and education (+1.3%).

It added that the implementation of the Festive Season Maximum Price Scheme for 2023 Chinese New Year and the setting of ceiling prices for cooking oil in bottles helped to cap inflation in the food at home sub-segment. 

Prime Minister Datuk Seri Anwar Ibrahim re-tabled Budget 2023 on 24 February 2023. Among the key points contained in the budget:

1. The government is forecasting Malaysia’s GDP to grow by 4.5% in 2023.
2. The fiscal deficit for 2023 will be lowered to 5.0% from 5.6% in 2022.
3. Inflation rate for 2023 is expected to be about 3.3%.
4. Development expenditure has been raised to RM97 billion.
5. Federal Government’s debt stood at RM1.07 trillion or 60.4% of GDP at the end of 2022. 
6. Personal Income Tax rates for residents has been reviewed with a 2.0% rate deduction for those with chargeable income band of between RM35,000 to RM100,000 while there is an increase of 0.5% to 2.0% for the subsequent chargeable income bands above RM100,000 to RM1.0 million per annum.
7. Luxury Tax to be imposed on branded watches and designer fashion items.
8. Excise Duty to be levied on liquid or gel (vape) products that contain nicotine.
9. Conduct a study on the proposed imposition of a capital gains tax for share transactions of unlisted companies from 2024 onwards.
10. The extension of the tax deduction of up to RM1.5 million to firms that list on Bursa Malaysia’s ACE and LEAP markets till year of assessment 2025.
11. Bank Negara Malaysia will also provide RM2.0 billion in financing to support green technology start-ups and help SME implement low carbon practices.
12. RM500 payment to individuals aged between 40-54 with EPF savings below RM10,000

CURRENCY

Although the Ringgit continued to decline against the US Dollar for the fourth week in a row, the magnitude of the drop has diminished significantly as most of the portfolio rebalancing exercises by the foreign fund managers to factor in further rate hikes by the US Federal Reserve has already been completed.

Therefore, the Ringgit’s performance going forward is likely to be range bound and data driven until the next Federal Open Market Committee (FOMC) meeting in 21-22 March 2023. The local currency ended the week at RM4.4330 / USD1.00 (+0.3sen) against the US Dollar.   

As expected, the Ringgit performed better over the past week as it managed to claw back some of its recent losses against some of the other major currencies.

The local currency gained against the Japanese Yen RM3.2760 / JPY100 (-0.3sen), the Singapore Dollar at RM3.2969 / SGD1.00 (-0.8sen) and the Euro at RM4.6951 / EUR1.00 (-1.9sen). It only lost ground against the British Pound at RM5.3332 / GBP1.00 (+4.7sen).  – 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