Investment Highlights

• Federal Reserve kept benchmark interest rates unchanged at 5.25%-5.50% after the conclusion of its recent FOMC meeting (31 Oct to 1 Nov 2023). This was the 2nd consecutive meeting that interest rate hikes in US have been paused. However, interest rates in the US are likely to stay high for longer, premised on i) the core inflation rate target of 2% is still not within reach anytime soon, and ii) potential need for the US government to raise funding via bonds to finance large budget deficits ahead. Thus far, the US Federal Reserve is still keeping interest rate hikes an open option going forward.

• Monetary policies in developed economies (US, Europe and UK) are likely to continue to be restrictive ahead with rate cuts not likely to occur until 2H24. Core inflationary pressures persist and are not expected to reach the targeted rate of 2% in the near term coupled with the labour market in the US remaining tight. The ongoing geopolitical tensions are likely to see prices of commodity prices continuing to be volatile and elevated. Arising from this, the increase in debt service cost on businesses and households in developed economies will be extended for a longer period from higher interest rates. Businesses with higher leverage are likely to continue to face pressures from elevated raw material prices while lower income households may have less cash buffers to withstand the high cost of living. Presently, core inflation in US stands at 4% as of end October 2023, still double of the target of 2%.

• Domestically, a slight tightening of liquidity has been seen with the increase in 3-month KLIBOR rate to 3.67% from 3.57% as at end Sept 2023. This has resulted in a wider spread of 67bps against OPR, higher than the historical average (Apr 2004 to Oct 2023) of 31bps (Exhibit 4). However, this does not portend any potential increase in OPR above the present level of 3% as domestic growth and inflation remain well balanced.

• 10-year MGS yield remained high at 3.9% presently tracking the elevated 10-year Treasury yield in US. Arising from the surge of 10-year MGS yield by 12bps QoQ to 3.97% in 3Q23, we expect banks to record unrealised losses on securities portfolio, resulting in weaker investment and trading income in 3Q23 and flattish treasury income in 4Q23. Our economist team expects the 10-year MGS yield to be 3.95% in 4Q23 before declining to 3.80% in 4Q24 (Exhibit 9).

• Advocate positioning in banking stocks such as CIMB and RHB Bank with low price-to-book values of below 1x that are expected to be less susceptible to downside risk. Also, we favor stocks with lower foreign shareholdings, such as Hong Leong Bank at 10.47% for more stability in share price against shocks from market stress or concerns weighing on global economic growth. Our team of economists anticipate that the Federal Reserve will cut interest rates in US by 75-100bps in 2H24 to 4.75%. Hence, we see the opportunity for investors to relook at banks, particularly Maybank in 2H24 in the event of any retracement in the share price. The stock is expected to benefit from stronger treasury and investment income from an anticipated decline in 10-year MGS yields when rate cuts in the US take place. This is due to its larger securities portfolio and higher market RWA to total RWA of 4.6% compared to most peers (Exhibit 7).

Source: AmInvest Research - 21 Nov 2023