Traders are likely to be cautious ahead of the state elections on August 12 - Manokaran

WEEKLY MARKET ANALYSIS BY MANOKARAN MOTTAIN

THE local stock market took a breather last week following as investors took the opportunity to lock in profits after its recent rally. As such, the benchmark KLCI Index ended the week on a slightly lower note at 1,445.21 points (-5.14 points or -0.35%).

However, trading activity slowed by over 12% to RM1.84 billion per day from RM2.11 billion per day last week. The overall trading value for the week is more or less in line with the past 100-day average daily trading value of RM1.87 billion per day.

In the bond market, bond yields continued to rise for the second consecutive week as investors assessed the latest emerging economic data to adjust their economic and monetary policy forecasts as well as evaluate the potential long term impact from Fitch’s downgrade of United States’ long term foreign currency issuer default rating. The US Federal Reserve has indicated that interest rate decisions going forward following its latest hike to the Federal Funds Rate to 5.25% - 5.50% will be data dependent.

Yields for the 10-year US Treasury (UST) jumped by nine (9) basis points to 4.04% from 3.95% last week in response to the downgrade of US’ sovereign rating by Fitch. However, the UST 2-year yields fell sharply by 11 basis points to 4.77% from last Friday’s close of 4.88%. This extends the yield curve inversion between the UST 2-year and 10-year notes to 55 weeks with yield spreads narrowing sharply to -73 basis points from -93 basis points last week.  

The 10-year MGS bond yields rose by 4 basis points to 3.87% from 3.83% last Friday. The negative yield spreads between both countries’ 10-year bonds have widened further to -21 basis points from -12 basis points last week.   

ECONOMICS

Rating agency Fitch downgraded the United States to AA+ from AAA, citing fiscal deterioration over the next three years and repeated down-the-wire debt ceiling negotiations that threatens the government’s ability to pay its bills. Fitch became the second major rating agency after Standard & Poor’s to cut the United States’ AAA rating. S&P currently has a AA-Plus rating on United States – its second highest rating.

Earlier in May 2023, Fitch had placed its “AAA” rating of US sovereign debt on watch for a possible downgrade, citing downside risks, including political brinkmanship and a growing debt burden. Fitch clarified that there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025.

Investors generally use credit ratings to assess the risk profile of companies and governments when they raise financing in the debt capital markets. The lower a borrower’s rating, the higher its financing costs.

Malaysian Palm Oil Council (MPOC) expects crude palm oil (CPO) prices to trade between RM3,700 to RM4,200 per tonne in the second half of 2023.  CPO prices had been rising over the past 2 weeks driven by concerns over reduced palm oil supplies, particularly as Malaysian palm oil production in 1H2023 decreased by 3% on a year-on-year basis.

MPOC also projected that the CPO prices might trade above RM4,300 per tonne in the long term and ahead into 2024 due to market uncertainties such as the sunflower oil situation from the Black Sea region and the uncertain outlook on Malaysia’s palm oil production.

In terms of demand, MPOC expects India and China would import a combined value of 16.5 million tonnes by December 2023 from 15 million tonnes in 2022. MPOC added that the ASEAN, Middle East and North Africa regions would also experience higher demand for palm oil due to inadequate domestic production and the competitive price of palm oil.

Knight Frank Malaysia (KFM) disclosed that Malaysia’s real estate sector has shown promising signs of growth and resilience in 1H2023 supported by a favourable economic landscape with 53,923 residential properties with a collective value of RM20.8 billion transacted in 1Q2023 alone.

During the review period, it noted that the condominium and serviced apartment segment in Kuala Lumpur experienced mixed results with properties in Kenny Hills and Mont Kiara seeing prices rising while those in KL City and Bangsar saw slight dips in the average transacted prices.

Nonetheless, the firm remains cautiously optimistic about the recovery of the residential property market due to rising borrowing costs and inflationary pressures. In the office sector, it observed rising market activity as the business climate continues to stabilise.

In the retail sector, KFM said Malaysia’s retail sales expanded 13.8% in 1Q 2023 but is projected to moderate to 4.8% for the whole 2023 due to weaker economic outlook ahead. Two (2) highly anticipated shopping centres – The Exchange TRX and Pavilion Damansara Heights with a collective retail space of circa 1.83 million square feet are expected to take place in 2H2023.

For the industrial sector, the market in Klang Valley continues to gain momentum, propelled by a surge in demand from end-users, manufacturers, and investors. It also added that Malaysia is becoming a favoured destination for data centres with Cyberjaya being the top location with Bukit Jalil and Petaling Jaya being the other emerging locations. 

Malaysian Rating Corporation Bhd (MARC) has maintained its 2023 Gross Domestic Product (GDP) growth forecast for the country at 4.2%. In addition it also expects inflation to soften to 2.8% this year from 3.3% in 2022 albeit with some upside risk.

For 2024, it expects the local economy to grow by 4,5% underpinned by stronger external demand and continued recovery in the tourism sector. It also expects inflation to continue moderating to 2.5% in 2024.   

CURRENCY

The Ringgit gained against all the major currencies over the past week with the exception of the Japanese Yen at RM3.20 /JPY100. The local currency made minor gains against the Euro at RM4.9830 RM5.0240 / EUR1.00 (-4.10sen), the US Dollar at RM4.5510 / USD1.00 (-0.20sen), the Singapore Dollar at RM3.3900 / SGD1.00 (-3.10sen) and the British Pound at RM5.7840 / GBP1.00 (-7.80sen).

MY OPINION

The KLCI Index performed within my expectations last week as it hovered within the 1,430 to 1,450 points as foreign investors started to take profit in the latter part of the week.

I expect the market to continue trading within the range in the coming week as investors and traders are likely to be cautious ahead of the state elections in Selangor, Negeri Sembilan, Pulau Pinang, Kedah, Kelantan and Terengganu this weekend. 

Although the performance of the MGS 10-year bonds was within my expectations, there is ever increasing pressure for yields to inch nearer to the 4.00% level given the yield gap against the UST 10-year yields that is brought about by the wide interest rate differential. In light of this, I am of the view that yield spreads will continue to move within a (+/- 10 basis points) range with a slight upside bias 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 as I don’t expect any major developments in the currency market in the near term. - 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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