• There were signs that foreign investors are returning

• This is usually the case post US’s policy meeting

• Will the Fed cut the rate in June or July?

We feel vindicated. The US’s central bank has finally let the smoke out. The US will finally see a cut in its policy rate come 2H24, a prospect we have consistently conveyed since January 2023. Jerome Powell did some justice last week amid his statement that could push the regional stock market higher in the near team, with more power in 2H24, thanks to US that finally has the courage to reduce the FFR post COVID-19 relentless rise. To recap, the FFR has been on the steady rise since May 2022 by big doses of increase, some as high as 75 basis points (bps). From just 0.25% in January 2022, the FFR has been tightened up to 5.25% due to combination of supply and demand imbalance that pushed inflation rate to hit generational high. Alarmingly, US’s CPI reached a ceiling of 9.1% in June 2022 which compelled a hard-line approach by US central bank. The by product of this is the scintillating pace of the USD while steam rolled all major currencies until recently. This is set to change amid the US central bank that set to normalize its interest rate in 2H24 by three adjustments.

Though it may seem too soon to do so given the snail pace drop in US inflation but the knock-on effect for any adjustment in interest rate may take up to 5-6 quarters to show its effect and hence, the need to make a stand. Indeed, the current level of US interest rate in above its neutral rate which is expected to be around 4.0%. It is therefore 125bps above the conducive level for US economy. Having said that, should the FFR is cut by 75bps in 2H24, means, there could be another 75bps cut in FFR in 2025, pushing the interest rate to align to its neutral rate. This means a downside risk to USD and therefore, an upside risk to Ringgit. The narrowing interest rate differential against regional interest rate and the prospect lower return in US suggests imminent portfolio rebalancing by hedge funds and funds manager. We are indeed seeing that sign. After tough few weeks since early March where foreign funds have been taking profit in our local market, we are seeing their return in the last 2 trading days last week though in small dose of net buy (combined: RM28mn). This is encouraging though consistent with past trend where foreign investors will either take profit ahead of US policy decision or stay at the sideline until there is a clarity on US’s policy direction. History repeat itself. Having said that, we foresee the steady return of foreign investors into our market though we may not be the primary option given the potential hot and sizzling Indonesia stock market following a stunning win by the incoming President, Prabowo Subianto (Prabowo). Of note, Prabowo has been announced as the winner in Indonesia’s recent presidential election and hence, to be installed as Indonesia’s 8th President. Probowo, having been in Jokowi’s cabinet, is expected to carry on with Jokowi’s growth agenda including to fast track Kalimantan as Indonesia’s new capital city. President Jokowi will end his term in October 2024.

Source: BIMB Securities Research - 25 Mar 2024