KLCI Index last week's performance could be sustained further - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE local stock market rallied last week powered by foreign fund managers buying into key index linked stocks. This helped to push up the market and triggering follow through buying support to push the KLCI Index to reach its next resistance level of 1,450 points.

The benchmark KLCI Index ended the week at 1,450.35 points (36.83 points or +2.60%). Trading activity picked up slightly to RM2.11 billion per day from RM2.06 billion per day last week. The overall trading value for the week has improved to 13.5% above the past 100-day average daily trading value of RM1.86 billion per day.

In the bond market, bond yields rose after the US Federal Reserve’s Federal Open Market Committee (FOMC) chose to increase the Federal Funds Rate (FFR) by another 25 basis points to 5.25% - 5.50% which is also its highest level since January 2001. Nevertheless, the bond market took comfort after the US Federal Reserve Chairman Jerome Powell indicated that the central bank could hold the FFR at these levels going forward depending on the economic and inflation data going forward. The US Federal Reserve has another three (3) more meetings in 2023.  

In response to the FFR rate hike, yields for the 10-year US Treasury (UST) rose 12 basis points to 3.95% from 3.83% last week with the UST 2-year yields rising four (4) basis points to 4.88% from last Friday’s close of 4.84% after it had rose sharply in the previous week. This extends the yield curve inversion between the UST 2-year and 10-year notes to 54 weeks with yield spreads narrowing to -93 basis points from -101 basis points last week.  

The 10-year MGS bond yield remained unchanged over the week to remain at 3.83% last Friday. The yield spreads between both countries’ 10-year bonds have widened to a negative carry position of -12 basis points last week.    

ECONOMICS

Prime Minister Datuk Seri Anwar Ibrahim unveiled the “Madani Economy: Empowering the People” economic initiative last week to address various challenges and issues related to the country’s economic competitiveness and investment attractions, as well as outlining actions to address current issues that affect people's lives.

He said the Madani Economy initiative has 7 key performance indicators to be achieved within 10 years. The seven indicators are Malaysia being in the top 30 of the world’s largest economies; top 12 in the Global Competitiveness Index; labour income constitutes 45 per cent of total income; women participation in the labour force reaches 60 per cent; top 25 in Human Development Index; top 25 in Corruption Perception Index; and fiscal sustainability with a fiscal deficit of three per cent or lower.

Anwar added that the economic structural reforms should aim to create more meaningful job opportunities, ensure equal opportunities and establish a social protection network for all citizens. The initiative also plans to enable the implementation of healthcare service reforms, education and human resource reforms, provision of infrastructure and public transportation, accessibility to basic facilities and affordable housing.

The Department of Statistics Malaysia (DSM) disclosed that Malaysia’s Consumer Price Index (CPI) eased to 2.4% on a year-on-year (y-o-y) basis in June 2023 from 2.8% in May 2023. It is also the lowest increase of inflation recorded so far in 2023.  

DSM added that the slower pace of inflation was due to slowing increases in the restaurants and hotels (5.4%), food and non-alcoholic beverages (4.7%) and the furnishings, household equipment & routine household maintenance (2.3%) segments respectively. The food and non-alcoholic beverages group, which contributes 29.5% of the total CPI weight, increased at a more moderate rate of 4.7% in June 2023 from 5.9% in the previous month. 10 states recorded increases below the national inflation level of 2.4% but six states - Sarawak (3.0%), Pahang (2.9%), Putrajaya (2.8%), Selangor (2.7%), Perak (2.7%) and Melaka (2.7%) recorded increases above the national inflation level.

DSM also announced that the compensation of employees in Malaysia grew 6.5% in 2022 and contributed 32.4% of the Gross Domestic Product (GDP) which grew by 15.7% to RM1.79 trillion in nominal terms. DSM said the statistics of income approach towards GDP were generated from the production in the economy comprising three key components, namely Compensation of Employees (CE), Gross Operating Surplus (GOS) and Taxes less Subsidies on Production and Imports (Taxes).

GOS expanded 23.9% (2021: 14.0%) while CE grew 6.5% (2021: 2.7%) which resulted in GOS expanding its GDP contribution to 67.0% (2021: 62.6%) while the GDP percentage of CE decreased to 32.4% from 35.1% in 2021, while Taxes contribution to GDP reduced to 0.6% as compared to 2.3% in 2021. DSM said the CE component, which encompasses the remuneration received by employees for their labour services provided in the production of goods and services, was driven by the services and manufacturing sectors which grew by 5.6% and 8.6% respectively in 2022. Both sectors contributed 86.3% if CE in 2022 with services forming 62.2% while manufacturing accounted for 24.1%.

DSM revealed that the average household income in Malaysia increased by 2.4% in 2022 to RM8,479 compared to RM7,901 in 2019 following the release of the Household Income and Household Expenditure Survey 2022. The median household income also increased moderately by 2.5% per year to RM6,338 in 2022 from RM5,873 in 2019.

This income value takes into consideration the average household size of 3.8 people, with an average of 1.8 income earners. States which had an median income above the national level of RM6,338 were Kuala Lumpur (RM10,234); Putrajaya (RM10,056); Selangor (RM9,983); Labuan (RM6,904); Johor (RM6,879) and Penang (RM6,502).

The average monthly disposable household income increased by 1.7% to RM7,111 in 2022 compared to RM6,764 in 2019, while the median monthly disposable household income increased by 1.9% to RM5,413 in 2022 from RM5,116 in 2019. In terms of income distribution, the B40 income threshold of 3.16 million households was RM5,249 in 2022; the M40 group had an income averaging between RM5,250 and RM11,819 while 1.58 million households are in the T20 category with income exceeding RM11,820. Meanwhile the Poverty Income Line rose from RM2,208 in 2019 to RM2,589 in 2022.

Malaysia External Trade Development Corporation (MATRADE) said Malaysian companies managed to garner potential sales worth US$38.4 million at the Semicon West 2023, held in San Francisco, the United States (US) recently and the achievement indicates the continuing interest and confidence in Malaysia’s technical capabilities in the electrical and electronics (E&E) industry.

11 local companies participated in the event which showcased a diverse range of cutting-edge products and technologies in automated testing equipment, vision inspection machines, precision dispensing systems, electronic manufacturing services, and outsourced semiconductor testing and assembly services. In 2022, Malaysia was ranked as the 12th largest exporter of E&E products and the sixth largest semiconductor exporter worldwide. Malaysia accounts for 7% of global semiconductor trade and 13% of global chip assembly, testing, and packaging activities. The E&E industry was Malaysia’s top exporter at RM593.52 billion (US$134.79 billion) in 2022 and accounted for 38.3% of Malaysia’s total exports with Singapore, USA, China, Hong Kong, and Taiwan being Malaysia’s key export markets

CURRENCY

The Ringgit’s held steady against the other major currencies over the past week with very minor changes except gains against the Euro at RM5.0240 / EUR1.00 (-5.00sen). The local currency ended unchanged against the Japanese Yen at RM3.20 /JPY100 and had minor gains against the US Dollar at RM4.5530 / USD1.00 (-0.40sen) and the Singapore Dollar at RM3.4210 / SGD1.00 (-0.50sen). It ended a shade lower against the British Pound at RM5.8620 / GBP1.00 (+0.10sen).

MY OPINION

The KLCI Index performed much better than my expectations last week as it decisively moved past the 1,400 -1,430 points range to hit the 1,450 points level.

The movement was also accompanied by sustained trading volume which suggests that the gains over the past week can be sustained barring any adverse developments.

The consistent buying activities from foreign fund managers is a positive sign for the market. In the coming week, I expect the KLCI Index to trade between 1,430 to 1,450 points as the market could consolidate at this range before making another breakout.  

The performance of the MGS 10-year bonds suggest that the local bond investors are expecting the UST 10-year yields to retrace back in the near term and as such they are holding off selling the MGS and await for further developments going forward.

Alternatively, continuing inflows from foreign investors are also keeping pace with the selling hence the yields remained at parity for the past week. Hence, I maintain my view of the yield spreads to move within a (+/- 10 basis points) range in the near term.   

The Ringgit performed according to my expectations last week and will likely to remain within the RM4.50 – RM4.60 range in the coming week on the back of continued inflows from foreign investors in both the local equity and bond markets. - 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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