SYNOPSIS

After finding stability in 1Q2015, global market were much choppier in 2Q2015 on worries over the increasing probability of an interest rates hike by the Federal Reserve in 2H2015 and Greece’s mounting debt issue that could force it out of Eurozone. The Malaysian stockmarket was also an underperformer owing to the negative bouts of events such as the weaker-than-expected 1Q2015 corporate earnings, the 1 Malaysia Development Bhd (1MDB) issues as well as the falling Ringgit that prompted a significant exit of foreign funds.

Global economic growth continues to be insipid in 1Q2015, curtailed by the weak activities in most developed nations amid the sharp decline in oil prices and slow consumer demand. The global economy is not expected to see significant improvements for the remainder of the year due to the still uneven economic recovery pace. Countries with strong dependence on commodities will continue to be affected by the low prices like crude oil, metals and agricultural produce, while the growth in the U.S. is still at patchy pace with an interest rate hike looming. Europe, meanwhile, is still grappling with Greece’s massive debts and a tentative recovery.

Although Malaysia’s 1Q2015 economic data was better-than-expected, the outlook from 2Q2015 onwards is likely to moderate with the implementation of the GST in April. This may see tapered consumer demand for at least 3-6 months and already there are signs of a slowdown with the Department of Statistics’ leading and coincidence indices slipping in April. The stagnating commodity palm oil and crude oil prices will also continue to affect growth. Hence, there remains no change to the government’s 2015 forecast with the GDP estimate at 4.5%-5.5% Y.o.Y, while the consensus estimate from private economist pegs the GDP growth at 4.8% Y.o.Y, which is also little changed from the earlier forecast and remains at the lower end of the government’s forecast.

While Greece has largely agreed to its bailout terms and there is some near term stability, the near-term global market outlook remains fluid as there are still uncertainties over its rescue plan. Therefore, significant “knee jerk” reactions (both positive and negative) to the new developments on Greece’s debt can still affect global markets. Beyond the Greece debt issue, we think the market’s direction will be dictated by the potential direction of U.S. interest rates, although European indices could rebound as the ECB’s QE measures will provide the buying catalyst for European stocks. Still, any upsides will be capped by the prevailing high equity valuations.

The FBM KLCI’s downside bias remains in play for now as market sentiments are likely to stay cautious amid the slower economic environment, weak Ringgit and slower corporate earnings growth. We expect the key index to linger between the 1,670-1,740 levels until further stability is found. We also think the 1,670 level should provide a strong near term support for now, but if the level is breached, then the outlook will turn significantly weaker as it could imply the start of another bearish trend. On the upside, the 1,750-1,780 levels are the main resistances

Given the cautious outlook, a more defensive strategy should be preferred to weather the uncertain market environment. We continue to advocate stocks that promises resilient earnings growth, including construction stocks as we believe the plethora of ongoing and upcoming infrastructure projects will keep the sector busy for the foreseeable future. We also advocate a broad selection of high dividend paying stocks as part of the defensive strategy that will cushion against the downside risk.

MARKET REVIEW 1Q2015

While several major equity benchmark indices staging record high closings in 2Q2015, questions regarding the long term sustainability of such increases have resurfaced throughout the quarter as some emerging markets endured another round of capital flight on the increasing probability of an interest rates hike by the Federal Reserve in 2H2015 and the tug of war emanating between Greece and its international creditors on its debts and the probable “Grexit” from the Eurozone bloc, which rattled many global markets. Furthermore, the lingering fear of a potential widespread outbreak of the Middle East Respiratory Syndrome (MERS) has capped the Q.o.Q performance of the MSCI World Index and when this accentuates, it could negatively impact the world economy and market sentiment as a whole as it has served as a dampener to the performance of the hospitality and tourism sectors for the affected countries.

Although the Q.o.Q performances on both the Dow and S&P 500 were relatively muted, the Nasdaq Composite and Russell 2000, however, managed to hit record levels as market participants continued their search for higher yielding investment opportunities (assets) amongst the biotech, technology and small cap sectors. On the U.S. labour market, despite the minor improvement in the weekly jobless claims and unemployment numbers, the labour force participation rate remains mired near 37-year lows, which implanted the basis for the delay in key interest rate hike in 2Q2015.  

As indicated by the CME Group’s FedWatch Tool, the rate hike is now anticipated to take place in September 2015 and while this may be touted as a sign of recovery to the world economy, it would also simultaneously:

(1) increase the yield of bonds which decreases the dynamics (risk-reward ratio) or the risk adjusted returns of stocks. vs. government backed debt instruments,

(2) translates into a higher financing costs for property players (including Real Estate Investment Trusts companies) and homeowners with variable interest rate mortgage loans,

(3) and higher cost of borrowings for new business/corporate loans,

Meanwhile, the massive bond-buying program in Europe has shown some immediate result as the Eurozone inflation data has improved over the quarter (which may signal a pick-up in the economic recovery). This has incentivise the ECB’s head honcho, Mario Draghi to stick with the full implementation of the Quantitative Easing program up until September 2016, whilst stressing the enormous tasks underlying most of the European governments to commit with their structural reform efforts for a sustainable long term recovery.

Despite some broad recovery in June, the gains, however, was not sufficient to contain the weaker European market sentiment throughout the entire quarter as the constant tussle between Greece and the International Monetary Fund (IMF) has sent tremors to Greece’s Athex Composite Index as the country teeters on the “Grexit” cliff. Consequently, the possible credit crunch facing many banks became more pronounced as the Greeks have withdrawn more than €3.0 bln off from the financial system in June 2015. To stem the increase of said significant outflow, the country imposed capital control measures in an attempt to restore an orderly withdrawal of funds.

The aforementioned negative development had also impacted the performances and market sentiment of key European stockmarkets with both the CAC and DAX (-8.5% and -4.8% Q.o.Q respectively) taking big hits – the latter was also weighed down by slower PMI manufacturing growth pace in April and May, while the FTSE (-3.7% Q.o.Q) tumbled to a three-month low despite the improvement in the U.K.’s trade deficit and consumer price level. Additionally, the Bank of England remains neutral over its key interest rates policy (0.5%) and the central bank expects the annual inflation growth rate to accelerate towards the end of 2015, boosted by expectations of a faster wage growth and a recovery in oil prices.

Owing to the liberalisation of the China-based stockmarkets and its capital account, the Shanghai Composite managed to double its market capitalisation value within a year and the surge has attracted huge interest from both institutional and retail market participants to join the bandwagon. However, the astronomical gains also sparked concerns of a bubble formation amongst Mainland stocks (both small cap and technology counters) and this has prompted the financial authority to intervene through the discontinuation of margin financing facilities to the retailers. As a result, financials and securities firms were affected as the main indices pared their Y.T.D gains or dipped into losses.

Concurrently, the other major Asian indices like the Hang Seng Index benefitted from the spillover effect from the euphoria over Mainland shares, while the Nikkei surged above its 18-year high level, driven by strong buying interest from the Japan’s government Pension Investment Fund, which outperformed the flattish Q.o.Q performance of the MSCI Asia Pacific Index.

Meanwhile, developing economies like Indonesia and Thailand bore the brunt of the foreign capital outflow as the Jakarta Composite fell 11.0% Q.o.Q, albeit the SET was relatively unchanged. The foreign fund repatriation also translates into a decline in their local currencies vis-à-vis the U.S. Dollar, which saw the Rupiah hit its Y.T.D. low of IDR13,385, while Thai Baht hit its Y.T.D. low of 33.91 bath on 5th June 2015. Additionally, the slowing economy growth and MERS spread in both Thailand and South Korea have pressured their central banks to cut rates again to prop up their declining domestic consumption rate and business investments/activities. Despite the said outflow, Vietnam’s Ho Chi Minh Index managed to rebound in the middle of May 2015 to outperform most of its ASEAN peers.

Source: M+ Online Research - 29 Jul 2015