Investors around the world are all fretting over a sharp slowdown in the economy, stagflation risks, and higher interest rates following surging inflation with the spectre of an impending recession on the horizon
Many now believe that the impending recession coming into the US may be sooner than later amid the odds that it might happen in 2023.
The World Bank has too projected a grim outlook for the world cutting the global forecast to 2.9% for 2022 from 4.1% previously adding that many countries are likely to face recession.
Central banks are also confused and confounded as to the course of action that they should take, trying to achieve a delicate balance between sustaining growth and containing inflation.
Looking at the equity markets in Malaysia, RHB Research strategist Alexander Chia said that equity markets currently are not compelling, considering the macro-economic uncertainties surrounding the world.
He said that inflationary pressures mounting on the economy are likely to add pressure on costs that would diminish their earnings and thus equity market is expected to be weighed down.
Inflationary pressures in the US have already led to the Fed’s hawkish stance adding that further pressure in hikes expected at the next sitting of the Fed’s meeting do not bode well for equity markets in Malaysia and around the world.
“The near-term of the market is likely to be choppy and increased volatility that may lead discerning investors to remain on the side-lines ahead of clearer macro-economic direction.
Still, he adds that there are values to be seen in certain sectors such as the Banking, Commodities, and Consumer stocks that are averse to the global risks
In the banking sector, analysts see healthy loan growth of annualized 6.8% and demand for credit is healthy as evident by 12%% growth in banking system loan approvals for Jan-Apr 2022 and banks’ confirmation of strengthening business momentum with the gradual recovery in Malaysia and the opening of international borders.
Following the OPEC meeting on June 1, oil rose more than 1% on Thursday after U.S. crude inventories fell more than expected amid high demand for fuel, shrugging off OPEC+’s agreement to boost crude output to compensate for a drop in Russian production.
Another factor that is likely to bolster prices was also due to supported by the European Union’s sixth package of sanctions against Russia, which will include an immediate ban on new insurance contracts for ships carrying Russian oil and a six-month phase-out on existing contracts. Brent crude oil is hovering around US$120 a barrel.
Going forward, the scenario may not be all gloom and doom a Malaysian economist chimed in saying that bounties to be gained in rising palm oil prices and higher crude oil would be able to buffer Malaysia against the seemingly odds that are staked in with neigbouring countries.
Head Of Research of CGS-Cimb Ivy Ng has projected 2Q22F earnings to benefit from high commodity prices (CPO, crude oil) due to the ongoing Russia-Ukraine war and higher consumer spending due to pent-up demand, as well as Hari Raya.
However, she said that will be partly offset by higher raw material, labour, and finance costs.
On the ringgit, a forex trader said that although the ringgit has weakened past the 4.41 region, he said attributed this to the demand for the US dollar by investors who intend to capitalise on higher returns from their investments in anticipation of US interest rate hikes.
The World Bank had said that the impact of rising interest rates in the US is expected to be less severe for Malaysia compared with other East Asia and Pacific (EAP) countries due to factors including Malaysia’s flexible exchange rate and large international reserves.
He said the reopening of the economy and increased economic activity would also bode well for the economy and indirectly the ringgit.
“While the ringgit is likely to be volatile in the short-term, the fundamentals of the Malaysian economy dictate a stronger ringgit amidst the gyrations in the near-term.
