• Foreign investors may shun Emerging Economies financial markets for now

• Sentiment to be dampened by a piping hot US labour market (April unemployment rate: 3.4%)

• To be added by the upcoming release of Malaysia’s 1Q23 GDP this Friday

It was a master stroke by Bank Negara Malaysia (BNM) following a surprise increase in OPR last week, pushing the benchmark interest rate to 3.0%, only a tad lower than the neutral rate of 3.25%. Should the economy recover further, the OPR could likely reach the 3.25% level in 2H, which we think the chance is more-than-even. Nonetheless, financial imbalance risks weighed heavily that tipped the scale towards normalization especially when inflation was seen moderating steadily. Hence, the pre-emptive measure to prevent financial imbalance risks particularly when OPR has been kept too low for too long due to COVID-19 disruption. Nonetheless, the decision to normalize the OPR failed to spark major risk taking by investors if the Bursa Malaysia major barometer is of any indicator. Note that Bursa Malaysia average traded value slipped further by circa 2.0% last week to a paltry RM1.5bn, indicating that investors have been nibbling mostly on penny stocks. Foreign investors have also not come back in a big way though we see some improvement week-on-week. On that score, we think investors may continue to shun the Emerging Economies financial markets due to elevated level of political risks particularly when several key countries are due for general elections in the immediate and short term, including Turkey (14th May), Thailand (14th May), Pakistan (no later than 14th October), Argentina (22nd October), Poland (October/ November) and Indonesia (February 2024). This is not to mention our very own six (6) state elections which must be held no later than mid-July. This will be the biggest test for the Unity Government particularly in states that are controlled by the opposition like Kedah, Kelantan and Trengganu. It will also be a test for states control by them like Penang, Selangor and Negeri Sembilan amid a fragmented Malays support and hence, the need for Unity Government to retain a comfortable number of seats in these states. In sum, investors may also shun Malaysia due to this risk factor.

Investors risk tolerance may also be capped by the release of Malaysia’s 1Q23 GDP this Friday particularly with moderating economic growth which may come in at 4.8% (consensus) versus 4Q23 of 7.0%. This is also expected to be slower than a year ago of 5.0% (1Q22). Nonetheless, 1Q23 GDP may surprise on the upside if based on BNM’s conviction to normalize the OPR last week. The positive policy tone suggests that economic activity may be stronger-than-projected particularly with a rapidly healing labour market. Investors may also stay at the sideline given the full blown of corporate earnings announcement which should gain more traction this week. Despite all these, month of May has always been a less-than-thrilling month for global equity market and we think history may repeat itself this year.

Source: BIMB Securities Research - 8 May 2023