Despite near-term risks stemming from monetary policy expectations being tweaked and spiking Middle East tensions, RHB continues to anticipate a resilient US economy, a gradual recovery in China’s macroeconomic fundamentals, and easing interest rates amid peaking inflationary pressures – all these bode well for regional equity markets.
RHB Investment Bank (RHB), in its Regional Strategy note today Apr 23), said the Indonesia and Singapore markets are noted for undemanding valuations – even though Indonesia has just undergone a change in government and the latter offers defensive qualities in a volatile environment.
Malaysia is a laggard play benefitting from a new political model and the implementation of a reform agenda. Thailand remains in a state of flux pending policy clarity.
Indonesia. The Prabowo-Gibran Golden Indonesia vision outlined 17 key programmes that impact consumer goods, housing development, MSME loans, and downstream mining.
These should bring growth opportunities in banking, consumer, cement, construction and mining, ie stimulating demand and creating jobs. The tactical investment strategy focuses on the consumer sector, anticipating a 2H24 commodities rally – particularly in oil & gas (O&G), gold, copper, nickel and pulp & paper – while remaining upbeat on banks despite potential short-term corrections.
RHB maintains their end-2024 JCI target at 7,900pts, or -0.5SD from the 5-year mean.
Malaysia. The outlook for Malaysia risk assets remains positive on brighter macroeconomic prospects, with corporate earnings having turned the corner.
Domestic reform initiatives are underway and will be an important catalyst to attract and develop new sources of FDI.
News flow remains positive, with the MYR already bottomed out, setting the stage for stronger foreign portfolio flows. Focus on beneficiaries of the key growth hubs in Johor, Penang and Sarawak with a trading bias, as the market adapts to the positive paradigm.
Key OVERWEIGHT calls are on sectors including property, construction, technology, healthcare, transport, O&G, utilities and rubber products. RHB’s end-2024 FBM KLCI target of 1,600pts is unchanged.
Singapore. Investors should focus on Singapore stocks that feature earnings sustainability and offer high yields amidst improved economic growth and elevated interest rates, with the SGD being an outperformer in ASEAN.
In the nearer term, RHB likes the banks as a proxy for higher-for-longer rates. Investors should buy stocks that offer robust yields and companies with visible earnings. REITs should outperform eventually, aided by interest rate cuts – RHB recommends that investors adopt a slightly more watchful approach and gradually add on to high-quality, large-cap S-REITs on weakness.
Thailand. Since Oct 2023, the market has been dragged by investor concerns over the new government’s economic policies, and uncertainties over external factors such as: i) Worsening geopolitical issues, ii) higher commodity prices and inflation, and iii) spiking interest rates.
However, RHB sees potential for improvement in fiscal and monetary policy actions. RHB expects the SET’s fundamentals to improve in 2H24. RHB’s year-end-2024 target for the SET is 1,549pts, based on 18.6x P/E.
Malaysia: So Far, So Good
The benchmark FBM KLCI has tracked 5.6% higher YTD – in line with expectations – albeit from a relatively low base. This made Malaysia the second-best-performing market amongst key ASEAN bourses this year, behind the Philippines.
This was helped by positive domestic political developments, net foreign portfolio inflows (adjusted for ANZ’s sale of its AMMB stake), encouraging business news flow (including the MoU on the Johor-Singapore Special Economic Zone (JS-SEZ) and an uneventful Dec 2023 reporting quarter that left FY24 earnings estimates intact.
This was offset by persistent MYR/USD weakness as markets pared back expectations on the pace of potential interest rate cuts by the US Fed, and the realisation that the pace of fiscal reform is likely to be more pedestrian than initially hoped.
Still optimistic for the remainder of 2024
RHB reiterate their optimistic outlook for equity markets going forward, most of the bad news is already in the price and they believe corporate earnings have turned a corner.
On the macroeconomic front, RHB Economics is positive on global growth prospects and remains bullish on China’s macroeconomic recovery story. It also maintains the view that the US monetary policy cycle will start reversing in 2H24, with two rate cuts expected (FFR futures are pricing in three cuts, in line with US Fed guidance).
Key news flow to monitor include US economic growth and inflation data, in addition to geopolitical flash points. Sticky inflation suggests a more persistent tighter-for-longer monetary policy environment and a delay in the pivot toward a softer USD.
RHB noted that the consensus base case is for the US economy to achieve a soft landing even as the monetary policy cycle crests. Any significant change in this core expectation would prompt a wholesale reassessment of our view of the equity market.
Nonetheless, they remain wary of market volatility as political rhetoric escalates in the run-up to the US presidential election in Nov 2024.
Key considerations for equity markets in 2024 Equity markets will continue to take their cue from a combination of external and domestic factors that ultimately have a bearing on the prospects for corporate earnings and investor sentiment as investors refocus on fundamentals.
External factors: i. How the global macroeconomic situation evolves. The US economy has proven to be more resilient, confounding expectations.
However, this is a double-edged sword, keeping inflationary pressures up and forcing the US Fed to adopt a hawkish tone.
The RHB house view is for a “no-landing” scenario for the US economy, helped by a robust jobs market. RHB Economics expects global growth to remain robust in 2024 with US and China GDP growth forecast at 2.5% and 5%. ii. China economic recovery. Further positive China economic, FX or corporate news flow will lift local investor sentiment on the back of the improved outlook for trade and tourism.
RHB Economics is already seeing early signs of China’s economic recovery, with the Government in discussions to introduce measures including bank support for eligible firms while contemplating extending unsecured loans to the embattled property sector.
RHB’s 5% GDP growth forecast for 2024 remains above consensus
US inflation data readings – RHB Economics believes that risks surrounding the global inflation outlook remain skewed towards the upside, while the US inflation may stay sticky into early next year. iv. US monetary policy narrative. In line with RHB Economics’ expectations, the US Fed left the FFR unchanged at the March Federal Open Market Committee (FOMC) meeting. The latest Feb PCE Index rose 2.8% YoY that was within expectations.
Recent comments from US Fed officials cements RHB Economics’ view that the FOMC is in no rush to cut rates – we observe signs that US FOMC members are gradually shifting towards less than three rate cuts in 2024.
RHB Economics reiterates its call for two cuts in 2H24 in September and December. However, earlier-than-expected rate cuts could materialise if core PCE inflation declines quicker than expected and if the US labour markets weaken sharply. v. USD/DXY trends.
RHB noted that the FBM KLCI is positively correlated to the MYR/USD rate. The stronger MYR/USD narrative will evolve in line with US rate cut expectations, progress on the reform agenda and other geopolitical developments.
Geopolitics – The Middle East situation remains on a knife’s edge and risks are elevated for an escalation of the conflict that could see a spike in oil prices, shipping congestion and higher freight rates. RHB also expect to see greater market volatility in the run-up to the US presidential election in November.
Domestic factors: i. Malaysia’s growth momentum to gather pace into 2024. Economic growth will be underpinned by the revival in the external sector, including manufacturing and exports. The rebound in the global technology cycle and improved regional economic landscape are expected to support the export-oriented segments.
Domestic demand would be bolstered by robust consumer and investment spending.
ii. Corporate Malaysia’s earnings. Corporate earnings have historically displayed a higher degree of fragility.
Nonetheless, with much of the negatives already priced in, RHB thinks corporate earnings have turned the corner for the most part, which should enable it to be more resilient than in recent years.
iii. Domestic political stability. The stability of the ruling unity government is essential to provide a solid framework, within which effective policies can be implemented to facilitate long-term growth and competitiveness.
Persistent efforts by the opposition to destabilise the Government will be negative for financial markets, and can impede economic growth if new investments are diverted elsewhere as a result.
iv. The reform agenda – Putting in place fiscal reforms to raise revenues and rationalise costs will have critical implications on the state of public finances. However, there is much scepticism on the quantum of political will available to take the hard (unpopular) decisions.
The window of opportunity will likely be a narrow one before the spectre of the 16th general election re-emerges on the political horizon, as the reforms will also come at a price, with markets needing time to adapt. Initiatives to reduce subsidies will have implications for inflation and may crimp disposable incomes.
