Economy

EU: ECB rates seen hitting peak of 3.25% before cut in July. The European Central Bank’s battle with inflation may end within half a year as policy makers begin to reverse rate hikes as soon as July, according to economists polled by Bloomberg. The deposit rate will be raised to a peak of 3.25% — from its current level of 2% in three steps. The survey shows two half-point hikes at the February and March meetings, followed by a 25 basis-point increase in May or June. The median analyst prediction then envisages cutting the rate back to 3% at the start of the third quarter. Such a scenario would suggest a drastic turn of events that the ECB doesn’t envision. Most of its officials see rates remaining where they are after the so-called terminal rate is reached and none have called for rate cuts. (Bloomberg)

EU: Germany debt dilemma tempts finance chief into bending rules. Germany’s finance minister plans to slam the debt brake back on this year even as he spends billions to cushion the fiscally conservative country from the energy crisis, a challenge that requires some uncharacteristic rule-bending. Europe’s biggest economy has had plenty of reasons to justify the decision to suspend its constitutionally enshrined limit on net new borrowing in 2020, when the bloc was engulfed by a pandemic that turned out to be only the first of a series of crises. Three years later, with Germany flirting with recession as it pays the price of decades of dependence on cheap Russian fossil fuels, its fiscally hawkish finance chief wants the government to return to a stability culture of spending only a limited amount more than it takes in. At issue is how Christian Lindner, who leads the business friendly Free Democrats in a coalition government with the Social Democrats and Greens, uses accounting gymnastics to reconcile restoring the debt brake with the EUR200bn he has unleashed to cushion businesses and households from the energy crisis. (Bloomberg)

China: Economy set to slow sharply in 4Q, policymakers face post-pandemic test. China's economy is expected to have slowed sharply in 4Q due to stringent COVID curbs, dragging down 2022 growth to one of its worst in nearly half a century and raising pressure on policymakers to unveil more stimulus this year. Data on Jan 17 is forecast to show gross domestic product (GDP) grew 1.8% in Oct-Dec from a year earlier, halving from 3Q’s 3.9% pace. Such an outcome would still exceed the second quarter's 0.4% rate of expansion. On a quarterly basis, GDP is projected to contract 0.8% in 4Q, compared with growth of 3.9% in July-Sept. The Chinese economy appears to have ended the year on a weak tone. Factory output is forecast to inch up 0.2% in Dec from 2022, slowing from a 2.2% rise in Nov, while retail sales is seen shrinking 8.6% last month, extending Nov's 5.9% drop. China is likely to aim for economic growth of at least 5% in 2023 to keep a lid on unemployment, policy sources said. (Reuters)

Japan: Top economic panel debates potential shift away from 'Abenomics'. The Japanese government's top economic policy panel on Monday held its first round of special sessions that will discuss the medium-to-long term direction of fiscal and monetary policies, including the pros and cons of "Abenomics". Japan pursued a reflationary policy led by monetary stimulus under former premier Shinzo Abe which has helped pull the world's No. 3 economy out of 15 years of deflation. Financial markets are, however, now more focused on if and when the central bank will pull back on monetary stimulus, given sharp rises in inflation. There's a global economic trend of shifting towards new policy as seen in US's calls for modern economic policy, which would mark a shift away from conventional supply-side economics. The sessions will be held several more times to reflect the debates on the government's annual economic policy blueprint, due out in June. (Reuters)

Taiwan: Remains as semiconductor leader as chip exports rise again. Taiwan’s exports of integrated circuit chips rose in 2022 for a 7th consecutive year, further solidifying the economy’s leadership status in a global semiconductor industry that has been roiled by US-China tensions and diversifying supply chains. Exports of IC chips — which are pivotal components of electronic appliances, computers and smartphones — rose 18.4% from a year earlier. It was also the 3rd straight year of double-digit growth. Efforts by others such as the US to bolster chips production won’t immediately have an effect on diminishing Taiwan’s importance. Taiwan’s significance in the industry rests on the output of giants like TSMC, which has more than half of the market share in global semiconductor manufacturing — especially in the manufacturing of the world’s most cutting-edge chips. (Bloomberg)

New Zealand: Business confidence at lowest since 1974. New Zealand's business confidence in the 4Q22 hit its lowest level since 1974 as companies grapple with higher interest rates, cost pressures and soft demand. A net 70% of firms surveyed expected general business conditions to deteriorate compared with 42% pessimism in the previous quarter. It added that business confidence is now at its lowest level since 1974, while on a seasonally adjusted basis it is the weakest since the survey started in 1970. On a seasonally adjusted basis, 73% expected business conditions to worsen, versus 43% pessimism recorded in the previous period. The survey's measure of capacity utilisation fell to 93.7%, from the previous quarter's 94.5%. The builders and retailers were the most downbeat in the Dec quarter. (Reuters)

Markets

Gamuda (Outperform, TP: RM4.30): Proposed to acquire 30% equity interest in ERS Energy. The Group’s first tranche of subscription shares at RM80m has been completed yesterday (Jan 16). Consequently, with the completion of the first tranche share subscription and allotment, ERS Energy has become an associate company of Gamuda. The balance of RM120m will be determined at a later stage based on ERS Energy’s funding requirement. (Bursa Malaysia)

Comment: We understand that ERS is expected to contribute RM12.9m and RM15.5m to the Group, translating to a 1% increment, on average, to its FY24F and FY25F core earnings respectively. Separately, its net gearing is estimated to increase from 0.14x to 0.16x post acquisition. Though earnings contribution from ERS may not be material at this juncture, we are positive with the Group’s initiative to grow its new revenue stream in line with its “Green Plan”. To recall, Gamuda will also effectively hold 64% of shareholdings in NEDA Pekan apart from the 30% stake in ERS Energy.

NWP Holdings: Issues arbitration notice in relation to aborted deal to own stake in air transport services provider. NWP Holdings unit has issued a notice of arbitration against Datuk Ismail Hassan over a dispute between the parties relating to the group's aborted venture into the private charter air transport services business. The group’s wholly-owned unit NWP Builder SB is seeking the return of the sum of RM4.1m, or any other sum deemed appropriate by the arbitral tribunal, from Ismail. (The Edge)

Binasat Communications: Clinches RM16m underground cable subcontracts in Penang. Binasat Communications’s 51%-owned subsidiary Borderless Connection SB has bagged two subcontracts worth RM16.3m to undertake underground cable-related works in Penang. Binasat said one of the subcontract jobs involves the design, supply and installation of a 132 kilovolt (kV) double circuit underground cable from Sungai Ara, Bayan Lepas into Sungai Tiram. The total subcontract price for the 14 months project, starting no later than Jan 31, is RM14.2m, the group said. (The Edge)

UMW Holdings: Sells record-high 383,054 vehicles in 2022. The UMW Group delivered a record-high of 383,054 units of vehicles in 2022, 46% higher than the 262,685 units registered in 2021. “Both UMW Toyota Motor (UMWT) and Perodua surpassed their sales targets for the year, mainly due to the robust demand driven by the sales tax exemption as well as the exciting new models launched during the year,” UMW said in a statement. In Dec 2022, the group delivered a record monthly sales of 41,664 units, 7% higher than the 39,034 units registered in Nov 2022. (StarBiz)

HSS Engineers: To provide project management services for Yellowwood data centre. HSS Engineers’s associate HSS Integrated SB has received a letter of instruction under its consultancy services framework agreement with Yellowwood Properties SB to provide project management services for a new build data centre campus and its electric substation in Sedenak Tech Park in Johor. The group said the services, valued at RM8.8m, will cover all phases of the project including project control and reporting, planning, construction management and health and safety management. The duration of the services is estimated at 18 months. (StarBiz)

Market Update

The FBM KLCI might open higher today after European stocks inched higher on Monday, as investors weighed cooling inflation on both sides of the Atlantic with warnings from central bank officials that interest rates would probably stay higher for longer than markets expected. The regional Stoxx Europe 600 added 0.5%, taking its gains for 2023 to 6%, while London’s FTSE 100 rose 0.2%, close to an all-time high. US markets are closed for the Martin Luther King Jr holiday, after Wall Street’s blue-chip S&P 500 notched its largest weekly gain in two months on Friday. European stocks in particular have benefited from signs of slowing price growth: the roughly 19% outperformance of the MSCI Europe index relative to the MSCI US index in dollar terms over the past 90 days marks the highest return in more than 30 years.

Back home, Bursa Malaysia ended marginally lower on Monday in lacklustre trading, driven by persistent profit-taking against selected financial services and plantation counters, amid mixed sentiment on regional markets. At the closing bell, the benchmark FBM KLCI had slipped 1.47 points or 0.10% to 1,493.56, from last Friday's closing at 1,495.03. In the region, Hong Kong’s Hang Seng index traded flat, though it has risen 8% so far this year. China’s CSI 300 index of Shanghai- and Shenzhen-listed shares rose 1.5%, taking its January gain to 6.4%. China’s National Bureau of Statistics will on Tuesday release what is likely to be its third consecutive disappointing estimate for quarterly expansion.

Source: PublicInvest Research - 17 Jan 2023