Summary

• The US GDP continues to grow, while inflationary pressure has been cooling off throughout the year. Thus, the market is pricing in at least 3 rate cuts for 2024.

• Overall external catalysts have been stabilising at least for the near term and investors should focus on domestic catalysts going into 2024.

• We expect infrastructure project could restart next year, while NETR and NIMP will provide decent growth. Besides, the Johor-theme could be emerging as a strong catalyst for 2024. Also, we like the data centre and tech-related investments.

• Given this setup, we expect there will be opportunities within the Construction, Building Materials, Property, Utilities, Technology as well as Consumer & Transportation, while Banking and Telco could be some defensive picks.

Global Catalysts

• Inflation has been on a declining trend… The CPI data has peaked at 9.1% YoY in Jun-2022 and continued to decline 3.1% YoY in November. Meanwhile, the PPI data has declined from 11.7% YoY in Mar-2022 to 0.9% YoY for the month of November. These showed that the Fed has been tackling the inflation effectively with the help of elevated interest rates environment.

• ...the Fed is turning dovish. Thus, in the recent FOMC meeting, the Fed is turning dovish without further increasing the interest rate. Also, the dot plot is showing that the Fed could be signalling for 3 rate cuts in 2024.

• Inverted yield curve environment. Yield curve remains inverted albeit rebounding significantly throughout the past months. Since the yield curve is negative, it might indicate that the market could still be anticipating a potential slowdown in the next 12-24 months. However, it might be a soft landing that the Fed is expecting.

US Economic Review and Outlook

• US economy is still growing. In 3Q23, the US GDP is still increasing at a faster pace of 5.2% QoQ, up from the initial estimate of 4.9%, while economists predicted 5%. The number was revised upwards on the business investment and government spending. However, the consumer spending came in at 3.6% as compared to the initial figure of 4.0%.

• US jobs data and unemployment rate. In November, the US job grew steadily with addition of 199k jobs vs. estimates of 180k, while the unemployment rate declined to 3.7%. Despite the elevated interest rate environment, the jobs data continue to be resilient, which the market could be looking at avoiding the recession concerns and may anticipate a soft landing approach to the economy.

• The Fed kept the interest rates unchanged… The Federal Reserve has kept the benchmark interest rates unchanged in the recent December FOMC meeting at 5.25-5.5%.

• …US Treasury yield declined. Meanwhile, the 10-year US Treasury yield surged above 5% briefly in late October for the first time in 16 years before easing in the past 6 weeks.

• Softening Dollar index following Fed’s dovish tone. Given the decline in the inflation data, the Fed turned dovish with potential 3 rate cuts by 2024, which has contributed to the weaker dollar movements recently.

US Outlook

• We expect the world largest economy to grow, premised on the following few factors:-

• Technological Innovations: The ongoing innovations and advancement in the AI space will provide more opportunities and poised to revolutionise in various industries. We expect this may boost productivity and creating new markets and should drive economic growth going forward.

• Global Trade: Despite ongoing trade war since Jan-2018 between the US and China, the US still rely on products imported from China, albeit at a softer pace in 2023 as compared to 2021-2022. We believe the world is interconnected and the globalisation effect should create opportunities for businesses.

• Manageable inflationary pressure. The inflation has declined and it could hit the Fed’s inflation target at 2% by end-2024 based on the current conditions.

• Downside risk. However, the downside risk towards the economy will include (i) a potential government shutdown, (ii) the debt ceiling discussion by 2025 and (iii) the threat of a wider war in the Middle East may dampen the recovery momentum. Also, the Bank Term Funding Programme will end 1st quarter next year, and it may put some pressure towards the banking sector in our view.

Malaysia Economic Review and Outlook

• Rebounded from 2.9% in 2Q23. The Malaysia GDP rebounded to 3.3% YoY in 3Q23, it was supported by the increase in domestic spending, recovery in tourism activities and higher construction activities, offsetting weaker external demand affecting goods productions and exports. Still, BNM and MOF are expecting that Malaysia GDP will be growing at 4-5% for 2023, while projecting similar growth rate for 2024.

• International tourists are growing. Since Apr-22, international arrivals are increasing, stabilising around 1.6-1.7m range as compared to 1.8-2.4m pre-Covid days, due to a delayed recovery from China. Going forward, the government has pushed Visit Malaysia Year to 2026, with a higher target of 26.1m arrivals and an estimated domestic expenditure of RM97.6bn. We opine that part of the tourism sector will be supported by the healthcare tourism segment as well.

• Based on Bloomberg consensus (Fig #8), the World GDP is likely to grow at a gradual pace of 2.6-3.3% over 2023-2025. Meanwhile, the US is expected to advance by 0.9-2.1% over 2023-2025. China and Malaysia will be growing at 4-5% for the same period.

• Brent oil price trended weaker. Despite the production cuts by OPEC+ and export ban from Russia, the Brent oil stayed on a weaker tone below the USD80/bbl level. However, we believe the softer dollar environment may bode well for the overall Brent oil price going into 2024. Likely, the support will be at USD72 and resistance will be located around USD85-90/bbl.

Market performances and review

• Both the MSCI World and S&P500 are trading at a premium vs. long term average, at the P/E of 20.1x and 22.9x vs. 10Y average P/E of 19.3x and 20.6x, respectively.

• However, the FBM KLCI is trading at a discount of 15.1x P/E vs. the 10Y average P/E of 17.4x. Overall, we believe foreign investors could start to position within emerging markets. Also, foreign investors may view attractive amid the soft ringgit and discounted valuation environment.

• Foreign buying interest picked up in 2H, but still negative overall in 2023. In 4Q23, we observed that the ADTV has rebounded to RM2.15bn vs. RM2.13bn in 3Q23. Meanwhile, foreign funds are still net sellers with an outflow of–RM2.42bn vs. net buying of RM2.03bn in 2022.

• More positives in the final quarter. In 4Q23, the FBM KLCI, FBM Small Cap and FBM ACE traded higher by 2.1%, 0.6% and 0.8%, respectively. Utilities (+14.1%) and Healthcare (+13.5%) were the top 2 leading sectors, while the Energy (-8.4%), Property (-1.8%) and Telco & Media (-0.6%) were the laggards.

1Q24 Strategy

• Government remained stable at least for the term. After the GE15 and 6 states elections, the market is expecting the government to remain stable for the term. Meanwhile, with the cabinet reshuffling done recently, we believe the additional Deputy Finance Minister, may boost the confidence of FDI returning to Malaysia.

• PMX’s charm as Finance Minister. Do note that several MOUs valued at RM170bn investment were signed back in Mar-23. Besides, PMX has inked several foreign investments namely from (i) Geely, (ii) Tesla, (iii) SpaceX. Recently, Nvidia has decided to collaborate with YTL on the data center venture which is worth RM20bn. We expect this to benefit the Construction, Property, and Building Material.

• Johor theme to flourish with the ongoing infra developments. Given the construction of JB-SG RTS link project rate is progressing well at 52% in Oct-23, we believe this may provide decent catalyst for the growth going forward. Moreover, the KL-SG HSR will start after the completion of the request for information process which has been extended to Jan-2024, according to MRT Corp. Overall benefiting the Construction and Building Material.

• Significant government masterplans. We have launched the National Energy Transition Roadmap and New Industrial Mater Plan 2030. Under the NETR, renewable energy generation capacity will be increased from 40% to 70% by 2050 and more than RM600bn is required for this deployment in the power sector. For NIMP, we believe this will provide positive opportunities towards smart factories, EV and chemical industries. Under this theme, we like Renewable Energy, Water segment, coupled with Technology sectors.

• Tourism & Healthcare. After the international borders being uplifted since 2022 and 2023 for the China borders, we expect more tourist arrivals to be seen going forward. Meanwhile, for the healthcare tourism, we believe this will be an area of growth into 2024. This should benefit the Glove, Hospitals as well as Medical Consumables segment.

• Budget 2024 to focus on welfare of the lower income population and rebuilding government coffers. Following the electricity, targeted subsidy for water will be introduced next year, while the market could be waiting for the upliftment of the sugar-controlled price by the government. Besides the SST being raised to 8% (from 6%), new taxes were being introduced such as (i) 10% capital gains tax on unlisted shares, (ii) 5-10% luxury tax and (iii) 15% Global Minimum Tax by 2025 in the recent Budget 2024. Under this theme, we believe there could be more upside towards the consumer sector.

• Net cash companies will be rewarded. Although the interest rate in the US is expected to decline throughout 2024, the elevated environment may persist and we believe the investors will opt for companies with net cash, low gearing and stable dividend track record.

Source: Mplus Research - 26 Dec 2023