• There have been talks that the Fed could begin discussion on potential policy rate cut

• FBMKLCI upside potential could be capped by weak December trade numbers and disappointing 4Q23 advanced GDP reading.

Contagion effect hit FBM Small Cap index amid a broad-based selling pressure that persisted throughout the week. Some counters hit limit down and this triggered waves of selling pressure. FBM Small Cap index erased closed to 5.0% last Friday against after reaching its highest points on Monday (17,187). The disappointing trade numbers and weaker-than-expected 4Q23 preliminary GDP numbers added to the suspense. Amid this chaotic week, foreign investors sold a net of RM67mn of equity market last week though cumulative YTD numbers remained resilient despite its moderation to RM365mn for monthto-date. On that score, DJIA closed strongly last Friday thanks to positive news flow that the Fed could begin the muchanticipated discussion on when to begin normalizing the FFR. We are of the view that the talk could be too soon especially when US’s inflation that just rebounded last December. In any case, the Fed is expected to keep the FFR steady in its 1st policy meeting of the year (1st February). We also don’t expect the Fed to raise the FFR at this juncture to reach its terminal rate of 5.75%. This would only choke the economy further amid the US’s economy that is expected to produce an uninspiring 2024 growth rate of 1.3%, a marked slowdown compared to 2023E growth estimate of 2.4%. We are of the view that the Fed will keep the FFR steady before starting to normalize the rate from July onwards. The FFR is expected to be cut by as much as 100 bps until end of the year before going for another 50-bps cut in 2025.

Though Wall Street overnight close was very encouraging as DJIA added close to 400 points but the impact to FBMKLCI could be capped by disappointing trade numbers. A stronger-than-expected December imports numbers were a bane to trade surplus, resulting in negative trade surplus of close to RM60bn (December). Malaysia recorded a negative trade surplus in many years following 2023 numbers that came in at -RM16.4bn, a sharp drop compared to 2022’s trade surplus of RM214bn. This was perhaps the main reason for disappointing A4Q23 GDP numbers which came in at 3.4% compared to consensus of 3.95%. The drag by trade could hurt 2023 GDP numbers which may come in at 3.8%, lower than the government’s projection of 4.0%. Though services sector could provide the much-needed lift but the visa free initiative for China, India, and Middle East countries only started on 1st of December. As such, the impact could be delayed. Though we expect the feel-goodfactor to continue in Bursa Malaysia but trading fear could continue especially after the contagion effect last week. FBMKLCI upside potential could also be capped by the less-than-appealing development on December trade numbers and A4Q23 GDP numbers. Funds managers could also be away given the holiday shortened week.

Source: BIMB Securities Research - 22 Jan 2024