• Various policy decisions could either make or break sentiment in 4Q.

• 4Q23 development to watch out for: Malaysia’s 2024 Fiscal Budget tabling, US two last policy decisions and OPEC+ supply cut trend

• In any case, USD is hugely overbought - due for a correction

• Portfolio strategy should pivot towards 2024

• Our FBMKLCI year-end target of 1,550-points remains unchanged.

3Q23 Equity Market Analysis

• FBMKLCI could have shined in 3Q23 if not for the final day of broad profit taking activity which saw FBMKLCI erased a whopping 15.9- points against the day before to finish at 1,424.17. It was a volatile 3Q23 for the index following the quarter’s high of 1,463.51 (16th August) and a low of 1,424.17 (29th September), close to 40 points difference. All in all, FBMKLCI shed a 4.8% YTD though it made some gains on YoY and QoQ basis. On that score, it added 2.1% and 3.4% on YoY and QoQ basis. FBM Hijrah fared slightly better following a decline of 3.1% YTD (better than FBMKLCI) and did well following an increase of 6.4% and 3.4% for QoQ and YoY basis respectively. Above all, we are witnessing a change in fortune for FBMKLCI following foreign institutional investors that accumulated an impressive RM2.2bn of Bursa Malaysia equities in 3Q23 (note: net capital inflow). This is against an outflow of -RM1.8bn and -RM2.2bn for 1Q23 and 2Q23 respectively. Impressive 3Q23 figures failed to push the overall tally however given YTD accumulated figure of -RM1.8bn, a huge reversal compared to 2022’s average of RM4.4bn.

• Investors sentiment in 3Q23 were, among others, dampened by the recently emerging systemic risk of US government shutdown which started in mid-September. The yet-to-conclude US interest rate upcycle remained a giant killer amid the US Federal Reserve that remains committed to clamp and fight inflation at any cost. The scintillating pace of global oil price sparked fresh fear about global inflation, pushing further the prospect of interest rate normalization around the world. China’s less-than-impressive economic momentum also hurt sentiment amid its property sector toxic asset issues and alarming banking sector debt. The sparkling form of USD is another bane, reflected in the steady rise of the Dollar Index. For Malaysia, the impending release of 2024 Fiscal Budget (October 13th) pushed investors to opt for a wait-and-see attitude and hence, the broad profit taking activity in the final trading day of the quarter.

• Ringgit oversold position is a concern. It closed the quarter at RM4.6950 per Dollar, a drop of 0.6% and 6.6% on QoQ and YTD basis. The stronger pace of Ringgit drop against Dollar Index (DI) is a cause for concern amid DI that jumped 3.2% and 2.6% on QoQ and YTD basis, not a mirror image of Ringgit form (note: opposite), suggesting our internal issues that could hurt the confidence over Ringgit. Though on nominal basis Ringgit was less-than-encouraging but on ‘real basis’ (i.e., REER) Ringgit was resilient, especially on YTD basis (-13.7%). With that, we expect export to rebound strongly in 2024, to be driven among others, by our external competitiveness thanks to undervalued Ringgit, a rebound in global growth (2024F: 3.0%; 2023E: 2.8%) and base effect advantage.

• How did we fare against regional peers and regional benchmark YTD? FBMKLCI which declined by 4.8% YTD outperformed SET (-11.8% YTD) though a laggard compared to STI (-1.0%), JCI (+1.3%) and PSEi (-3.7%). It also trailed MSCI AP ex-Japan (-2.7%), the region’s benchmark index. Note that only JCI recorded growth in 3Q23 (YTD) in ASEAN as investors were encouraged by Indonesia’s enduring economic prospects (i.e., developed nation by 2046 and capital city relocation to Kalimantan). This is further translated into Rupiah’s strength which increased by 0.7% YTD, a contrast against other peers including Ringgit (-6.6%), Singapore’s Dollar (-2.0%), Thailand’s Baht (-5.7%) and Philippines’s PESO (-1.5%). It is imperative to highlight Ringgit’s poor performance YTD which is both a concern and an opportunity.

• How about capital inflow into equity? How did Bursa Malaysia do compared to ASEAN-4 peers? On that score, Bursa Malaysia YTD equity capital outflows of -RM1.8bn is a huge disparity compared to Thailand Stock Exchange significant outflows of -USD21.5bn, Philippines’s - USD3bn - a contrast compared to Jakarta Stock Exchange net inflow of +USD5bn. With challenging external condition and various shocks reverberating since early of the year, Bursa Malaysia form can be described as ‘resilient’ vis-à-vis regional peers with the exception of Jakarta Stock Exchange. No info is available for Singapore’s Stock Exchange capital flows.

• FBMKLCI was also dragged by challenging economic performance amid its GDP growth that could be lower than the authority’s expectation (BNM 2023F: 4-5%). The first sign is Malaysia’s PMI Manufacturing Index lackluster form which sustained below the neutral level for 12 straight months since September 2022. This signals trouble for one of our main engine of growths, manufacturing sector. This hampered our export momentum which decelerated markedly in 3Q23, affected among others by a noticeable slowdown in manufacturing exports and by extension, electronics and electrical goods (E&E). Exports high base effect was also a bane following our record surplus last year.

• FBMKLCI ended 3Q23 at a PER of 13.1x, a 21.0% discount against a 10-year average of 16.7x (note: excluding COVID-19 years). Though FBMKLCI may continue to benefit from the steady return of foreign institutional investors, the momentum could be capped by an equally or more attractive regional peers trading position particularly JCI (3Q23 PE: 17.4x; 10-year average PE: 20.1x; 13.4% discount), PSEi (3Q23 PE: 12.9x; 10-year average PE: 18.0x; 28.3% discount), SET (3Q23 PE: 19.4x; 10-year average PE: 16.8x; 15.4% premium) and STI (3Q23 PE: 11.1x; 10-year average PE: 14.2x; 21.8% discount). Based on 3Q23 trading value, we opine FBMKLCI and PSEi has the most bullish prospects in the near term (refer to Table 4).

• We foresee several uncertainties in 4Q23 that could be dampen trading sentiment, chiefly the US interest rate upcycle which has yet to reach its peak. US Federal Reserve penciled that they there are not finished raising the FFR, amid 1-2 more adjustments that will push the FFR to 6.0%, the highest level since December 2000. If this is the case, USD could rise further, at the expense of global currencies, a downside risk for Ringgit

• Oil price, using Brent Crude as a benchmark, could remain northbound and test the USD100 per barrel level in 4Q23 (year high September 2022: USD95.31 per barrel; YTD average: USD82.55 per barrel) thanks to concerted efforts to support oil price particularly OPEC+ supply cut initiative (3.66mn bpd; Saudi Arabia: 1mn bpd, Russia: 300k bpd). This is could dent sentiment as it could trigger global inflationary pressure and consequently, growth risks.

• Malaysia’s unique set of challenges is also a risk factor to investors. Having said that, the uncertainty over Malaysia’s 2024 Fiscal Budget strategy particularly with the impending implementation of Subsidy Rationalisation Initiative (SRI) could push investors to the sideline. There could be a reverberating impact to private consumption activity if the government proceeds with plans to normalize the prices of goods and services. The most contentious issue however is the untenable government position to continue subsidizing the pump prices, which takes up a huge amount of annual subsidy. The uncertainty over policy change involving subsidy may impact risk appetite in 4Q23, with a likely spillover effect into 1Q24 amid inflation that could rebound in 2024 due to the impending implementation of SRI.

• Nonetheless, we opine that investors will price-in the prospect of a lean government fiscal position from 2024 onwards thanks to reform initiatives (Malaysian Plan 12th, Fiscal Budget 2024), stable political condition post state elections, Ringgit competitiveness, moderation in US inflation in 2024, and the prospects of policy rate cut by Federal Reserve which could reach as high as 100 bps in 2024. On that score, we retain our 2023 year-end target of 1,550-points.

Source: BIMB Securities Research - 2 Oct 2023