While the day may have started on a worrying note, we found the overall sentiments following the unprecedented win by Pakatan Harapan have turned positive. This was reflected by some key indicators that saw improvements during the intra-day — (1) 5-year credit default swap (CDS), which is used to measure risk aversion, fell by 3.7 points to close at 85.7; (2) the ringgit settled stronger against the USD at 3.95; (3) 10-year MGS yield ended lower at 4.16; and (4) the KLCI rose 23 points to 1,850 despite foreign selling of RM682mil.

Although there was an improving intra-day trend, we expect some level of volatility to remain at least in the near term. Part of it will come from external noises, especially the US Fed rate hike aggressiveness and potential incoming data that will indicate the ECB’s ability to end the QE by end-2018. On the domestic scene, while confidence is being restored with the strong track record of the 7th prime minsiter, the 5 Council of Elders members, naming of three senior cabinet ministers as well as the potential release of Datuk Seri Anwar Ibrahim with a full pardon, investors will be looking at the formation of the full cabinet while seeking clarity on several points in the PH manifesto.

• Following the unprecedented win by Pakatan Harapan (PH) in the GE14, the markets have reacted with a knee-jerk of selloff, which is expected to last for a while. Though we subscribe to this we view, we felt the negative knee-jerk reaction may not last long, perhaps could even be as short as a day.

• We found the 5-year credit default swap (CDS), which is used to measure risk aversion, fell by 3.7 points to close at 85.7 on May 14 . At the same time, the ringgit, which started at 3.99 against the USD, eventually settled at 3.95 at the end of the day, moving in tandem with regional currencies with the exception of the Philippines peso, Chinese yuan, Indian rupee and Indonesian rupiah which fell for the day.

• Meanwhile, the 10-year MGS, which started around 4.25%, saw some upwards pressure but eventually ended around 4.16%. Though the KLCI saw a net outflow of foreign funds amounting to RM682mil, the local bourse closed higher by 23 points to end the day at 1,850.

• Despite witnessing an improving intra-day trend, we expect some level of volatility to remain at least in the near term. Part of it is externally driven by the US Fed rate hike aggressiveness i.e. whether it will be a total of three or four in 2018, plus the potential incoming data that will indicate ECB’s ability to end the QE by end-2018.

• On the domestic scene, while confidence is being restored with the strong track record of the 7th prime minsiter, the 5 Council of Elders members, naming of the three senior cabinet ministers as well as the potential release of Datuk Seri Anwar Ibrahim with a full pardon, investors will be looking at the formation of the full cabinet. Although rating agencies like Fitch and Moody’s have reiterated their overall ratings on Malaysia, many others, including them, will be looking for clarity on several points in the PH manifesto.

• On the whole, we are maintaining our projections for 2018 with the full-year GDP at 5.5%, inflation at 2.5% – 2.8%, the KLCI at 1,900 based on an earnings growth of 6.9%, 10-year yields at 4.20%, the ringgit at 3.90-92 versus the US dollar, and the fiscal deficit at -2.8% of GDP. We reiterate our OPR outlook at a 45% chance of BNM raising rates in 2H2018.

Source: AmInvest Research - 15 May 2018