Lack of follow through buying support to push KLCI, says Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

The local stock market ended the week on a slightly higher note on the back of buying support on index linked stocks. The benchmark KLCI Index ended the week at 1,390.89 points (+2.28 points or +0.16%).

However, trading activity and value fell back to RM1.65 billion per day from RM2.09 billion per day last week in the absence of any major window dressing or portfolio rebalancing exercises. This led to the overall trading value for the week to end 21% below the past 100-day average daily trading value of RM1.98 billion per day.

In the bond market, US Federal Reserve Chairman Jerome Powell suggested that the battle with inflation still has a long way to go and the central bank could still continue to raise interest rates to control inflation but its decision would be data dependent. Meanwhile, the initial weekly jobless claims came in above expectations at 264,000.

The 10-year US Treasury (UST) yields fell by three (3) basis points to 3.74% from 3.77% in the previous week and the total yield gains over the past 52 weeks widened slightly to 62 basis points.   

However, the UST 2-year yields rose by three (3) basis points to 4.75% from last Friday’s close of 4.72%. This continues the yield curve inversion between the UST 2-year and 10-year notes into its 50th consecutive week with the yield spreads widening to -99 basis points from -95 basis points last week.  

The 10-year MGS bond yield rose by a further seven (7) basis points last week to 3.82% last Friday from 3.75% in the previous week. The yield spreads between both countries’ 10-year bonds moved into a positive 8 basis points from -2 basis points last week.    

ECONOMICS

Prime Minister Datuk Seri Anwar Ibrahim who is also the Finance Minister said the Federal Government will reduce the stamp duty rate for shares traded on Bursa Malaysia Securities from 0.15% to 0.10% subject to a maximum cap of RM1,000 per contract.

The change will reduce the cost of transactions and help to make the local stock market more competitive. In addition, the Ministry of Finance and Securities Commission will also re-look at policies to facilitate and attract more family offices to set up in Malaysia as well as widening the definition of sophisticated investors to include angel investors, venture capitalists and private equity firms.

In the meantime, the Securities Commission and Bursa Malaysia will also implement reforms this year to expedite the Initial Public Offering (IPO) process to encourage more companies to be listed on Bursa Malaysia. He added that all these measures would help to increase the market vibrancy and increase the attractiveness of the Malaysian capital market.  

RAM Ratings disclosed that foreign investors remained net buyers of Malaysian bonds for the fifth successive month in May 2023 with a net inflow of RM3.0 billion from the RM1.5 billion in April 2023 on expectations of the US Federal Reserve (US Fed) ending its rate hike cycle. Demand was primarily for Malaysian Government Securities (MGS) and Government Investment Issues (GII).

Malaysia gained five (5) places to 27th position in the 2023 IMD World Competitiveness Ranking (WCR) on the back of a robust economic recovery, investment growth, exchange rate stability and the labour market.

While Malaysia’s strengths include prices, basic infrastructure and tax policies, the IMD noted that the country required improvement in the following sub-factor rankings: business legislation, education, and sociocultural framework. The IMD World Competitiveness Report is based on 336 competitiveness criteria which are divided into four categories: economic performance, government efficiency, corporate efficiency, and infrastructure.

The Department of Statistics Malaysia (DOSM) reported that Malaysia’s total trade in services for 2022 totalled RM336.9 billion, which translates to 18.8% of the gross domestic product (GDP at current prices) while the deficit in services trade narrowed to RM56.4 billion against the previous year thanks to a huge increase in the travel segment which registered RM28.4 billion against RM0.3 billion in 2021.

Exports of services grew to RM140.3 billion in 2022 from RM88.1 billion in 2021 while imports of services rose to RM196.7 billion in 2022 from RM153.7 billion in 2021. Despite the positive growth, the value of exports and imports remains considerably lower than the pre-pandemic peak of RM82.1 billion and RM51.3 billion in 2019.  DOSM said the United States emerged as the leading destination for Malaysia’s services trade in 2022 with exports to the US totalling RM36.7 billion while imports stood at RM56.6 billion.

DOSM reported that Malaysia’s with the Consumer Price Index (CPI) in May 2023 slowed to 2.8% from 3.3% in April 2023. The easing inflation was mostly attributed to a fall in food and non-alcoholic beverages index which dropped to 5.9% from 6.3% in April 2023; the transport index which declined to 1% from 2.3% in April 2023 and furnishings, household equipment and routine household maintenance index which fell to 2.7% from 3.0% in the previous month.

However, the higher restaurants and hotels index rose slightly to 6.7% from 6.6% in April 2023. The weight for the food and non-alcoholic beverages group (29.5%), transport (14.6%) and restaurants and hotels (2.9%) constituted 47% of the total weight for the CPI. In May 2023, Malaysia’s inflation was lower than the Eurozone (6.1%), the United States (4.0%), the Philippines (6.1%), Indonesia (4.0%) and South Korea (3.3%).

CURRENCY

The Ringgit had a tough week against other major currencies over the past week. It weakened against all of the currencies starting with the Japanese Yen at RM3.30 /JPY100 (+10.00sen), the US Dollar at RM4.6740 / USD1.00 (+6.40sen), the British Pound to RM5.9480 / GBP1.00 (+3.20sen), the Euro at RM5.0810 / EUR1.00 (+3.50sen) and the Singapore Dollar at RM3.4570 / SGD1.00 (+0.80sen).  

MY OPINION

The KLCI Index struggled throughout the week to break the 1,400 point level before settling slightly lower at 1,390 points. This was because there was a lack of follow through buying support to push the index past the psychological 1,400 points as trading activity thinned during the week.

Investors and traders were also hesitant to take large positions in the absence of positive market catalysts. As the current situation is likely to persist for some time, I am maintaining my view that the KLCI will continue to trade between the 1,375 -1,400 points range in the coming week.  

The performance of the bond market last week remains within expectations as both the UST and MGS yields was trading within a narrow +/-10 basis points range. The negative carry of the 10-year MGS against the 10-year UST finally ended after four weeks as MGS yields moved up. Nevertheless, I believe the yield spread will continue to widen further in the coming weeks especially if the US Federal Reserve continue to increase the Federal Funds Rate. 

There was no reprieve for the Ringgit as it continues to weaken against the major currencies on expectations that their central banks will continue to raise their benchmark interest rates by another 50 basis points in the coming months to combat inflation.

The Bank of England (BOE) surprised the financial markets last week with its 13th consecutive increase as policymakers grapple with persistently high inflation as the annual UK consumer price inflation in May 2023 stood at 8.7%, unchanged from the previous month.

This prompted the BOE Monetary Policy Committee voted 7-2 in favor of a 50 basis point increase, which brings the bank’s base rate to 5.00%. The economists had earlier expected a 60% chance of a 25 basis point hike. Core inflation was 7.1% year-on-year in May 2023 from 6.8% in April 2023 and is also its highest increase since March 1992.

As such, I am adjusting my views on the US Dollar trading band to between RM4.62 – RM4.72 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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