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1Q23 Outlook & Strategy - Winter always turns into spring

MalaccaSecurities
Publish date: Wed, 04 Jan 2023, 06:43 PM
An official blog in I3investor to publish research reports provided by Malacca Securities research team.

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  • The long-awaited recovery is likely to emerge with the reopening of China’s travel borders. We believe this will be able to offset the recession risk under the (i) elevated interest rate environment, (ii) ongoing tension between the Ukraine and Russia and (iii) overheated inflationary pressure at least for 1H2023.
  • We are feeling cautiously optimistic on the local front after (i) a solid GDP growth in 2022, (ii) stable political environment and (iii) the reopening of China’s borders.
  • Hence, we have a few themes under our 1Q23 outlook and strategy, namely the (i) Recovery, (ii) Renewables, (iii) Commodities and (iv) Resilient.

China reopening borders & Covid-19 situation

  • Spiking cases in China... At our end, we have seen stabilising Covid-19 conditions and indicators are pointing that we are able to live with the virus going forward. However, with the reopening of borders, it might affect the situation outside of China. Reasons being (i) it might be a new Covid-19 variant and (ii) the efficacy of vaccines is diminishing hence protection against the virus might be fading.
  • …but borders are reopened! Since Malaysia has reopened the travel borders in Apr- 2022, tourists are growing exponentially. With the tourists from China entering our country, it should provide a “wow” factor for the growth in the economic activities.
  • Business activities should return to normalcy. Based on the recent GDP numbers, Malaysia economy grew at 14.1% YoY in 3Q22. We believe the 4Q22 GDP will stay in the positive zone. Given the return of travellers in Malaysia, we are likely to expect decent growth into 2023. Nevertheless, business operators will remain cautious in view of the high interest rate environment.

Economic review and outlook

  • Elevated interest rate environment… Although the market is expecting a pivot from the Fed by March 2023, we believe the interest rate will stay elevated around 4.4- 5.0% throughout 2023 as persisting inflationary pressure as shown in the US CPI is still far away from the 2% YoY inflation target by the Federal Reserve.
  • …and unwinding of balance sheet. The US central bank has been tapering USD47.5bn (USD30bn in Treasuries and USD17.5bn in MBS) per month starting from Jun-22 and has stepped up the unwinding of balance sheet to USD95bn (USD60bn in Treasuries and USD35bn in MBS) from Sep-22 onwards.
  • USD index has peaked around 114-115 zone. Following the gradual decline in the US CPI data, the pace of the interest rate hike may cut back. Thus, translating to softening of the USD strength in the recent months. Given that decline, we expect funds may flow into regions such as the emerging markets at least in 1H2023.
  • Bloomberg commodity index (BCI) continued to be supported along 110. Also, we expect a spike going forward to 120 on the back (i) unresolved Ukraine-Russia war, (ii) softer USD movements and rising demand from China reopening activities. However, should the economy fall into a recession mode, the commodity index may decline significantly.
  • Is the market pricing in a hard landing? Given the elevated interest rate environment as well as persisting inflationary pressure, disposable income will be hit, and that could be the possible scenario where the market is pricing in.
  • Bank of Japan surprised move in the expanding of the trade band for long term Japanese government bond yields was taken as a hawkish or monetary tightening move by the BOJ, hence the yen has jumped against the USD following this event.
  • Recovering Malaysia economy. Meanwhile, the Malaysia’s economy will remain on track to chart a positive growth for 4Q22 and 2023 following the (i) reopening of borders, (ii) full resumption of business activities since Apr-22 and (iii) China relaxing most of the Covid-19 measures should contribute to tourists returning and providing a “wow” factor to our business growth going forward. We believe Malaysia still has the edge in providing products and services in the global arena with the fairly weak ringgit position. Based on the consensus, Malaysia’s GDP could grow by a rate of 8.4%, 4.0% and 4.5% in 2022-2024, respectively.

Market review

  • MSCI World and S&P500 are at discount, trading at the PE multiples of 16.5x and 18.3x vs. 10Y avg PE of 20.2x and 20.4x, respectively. Meanwhile, the FBM KLCI is trading at 15.5x PE vs. the 10Y avg PE of 17.7x. Although they are at a discount mode, we believe the market might be pricing in a slowdown of earnings in 2023.
  • QoQ, trading activities are gaining traction. Although we noticed that the YTD ADTV declined to RM2.02bn vs. RM3.54bn in 2021. QoQ, we observed the improvement of ADTV from RM1.62bn in 3Q22 to RM1.94bn in 4Q22. Foreign funds are net buyer valued at RM4.44bn for 2022.
  • Broader market rebounded in 4Q22. In 4Q22, the FBMKLCI, FBM Small Cap and FBM ACE advanced 7.2%, 8.8% and 14.0%, respectively. All the sectors gained momentum except for the construction sector, which was marginally lower by 0.1%. The top 3 sectors include the healthcare (+17.9%), energy (+15.8%) and transportation (+10.8%).

Source: Mplus Research - 4 Jan 2023

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