A lot of the optimism and disappointment in the market this year still revolves around the US Fed and its interest rate decisions.
While the US Fed decided to ‘skip’ instead of ‘pause’, markets did not show disappointment as the US, European, and North Asian (except Hong Kong) continued to gain ground.
In the region, FBM KLCI and other ASEAN peers continued to be a laggard. Foreign fund flows also mirror indices’ performance, with funds converging in North Asian markets at the expense of ASEAN markets (except Indonesia).
Investment house MIDF said it has observed continuing two-tiered market in Malaysia in 1HCY23. While FBM KLCI underperformed (-6.7%ytd), FBM 70 rose +3.3 Global growth is projected to be moderate at +2.8% (2022: +3.4%). Nevertheless, strong labour markets registered thus far and increased income helped to sustain spending growth.
Inflation remained elevated in many countries where it is increasingly driven by surging demand. In response, major central banks continued to raise its policy interest rates higher.
The house expects the recent weakness in most currencies against the US dollars will be reversed when the US Fed finally decides to end its policy tightening. MIDF forecasts at least another hike at the next meeting, as priced in by the market. It maintains the expectation of Malaysia’s GDP growth to moderate to +4.2% in 2023.
It also opines for BNM to consider another 25bps rate hike in 2HCY23 following the stronger-than-expected domestic economy. Despite the prevalent fears of a forthcoming recession, MIDF posits the risk asset markets (and equity in particular) are tilting toward the upside in the short to medium term.
The intervening period between the end of US Fed rate hikes and the start of the recession could prove (paradoxically) attractive for equity pricing.
Going forward, MIDF reckons the upward momentum would resume especially post-Fed pause, with international funds rotating into emerging ASEAN on weaker US Dollar and attractive valuation.
Also, to expect a recovery in both the valuation and earnings expectation of banking stocks. Accordinghly, the house revises the FBM KLCI end-2023 target (from 1,590 points) to 1,540 points.
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