• We expect greater stability in 2025 amid better policy visibility especially in advanced economies.

• Malaysia 2024 reforms efforts to bear fruits in 2025

• Better clarity on US’s policy path in 2025 – better risk-reward proposition

• That said, investors should start pivoting towards next year

• Our FBMKLCI year-end target of 1,720-points remains unchanged though we will revisit this during our 2H24 strategy release amid several unfolding events.

Investment Proposition: What to Expect for the Remaining of 2024

Sentiment for the rest of the year will remain dictated by several key factors, particularly the US’s policy path. When will the US start normalizing the FFR, will remain a hotly debated topic well into the 2H24. With US’s inflation that remains sticky, touching 3.5% in March (February: 3.2%; January: 3.1%), quite a distance compared to its central bank target of circa 2.0%, will emerge as the biggest hurdle for the global equity market. This also means that USD will reign supreme until and unless US inflation is convincingly on the way down. That is also the biggest dampener for the turnaround in Ringgit. Reliable pundits predict circa RM4.45-RM4.50 per Dollar year-end target for the national currency, however. That is a cool 6.9% jump from the current level (April 15th: RM4.78 per Dollar). US unemployment condition will also determine investors’ risk tolerance amid the still sizzling and hot US labour market. The biggest worry is US’s JOLTS that remained above 8mn (February 2024: 8.7mn), close to 60% higher than the pre COVID-19 level. That said, Phillip Curve theory suggests slippery road for US’s inflation in the near term. The escalating tension in the Middle East (ME) could also push investors to be overweight on safe haven assets, namely USD and US Treasury apart from gold, another setback for the Ringgit. On the same beat, we are concerned over the boiling situation in the ME which could easily escalate into a full-blown war, jeopardizing the supply of oil from the region. So far, only Iran involves in the fray though we are not sure about new ally. The absence of peace maker, either from UN or the AEs, is also a concern which could tip the region into an extended period of turmoil. Positively, the bottoming out of China’s economy will endear investors sentiment over our country, thanks to China that is getting its house in order. China’s March Manufacturing PMI zoomed to 50.8 against 49.1 in February

Above all, will the government bite the bullet on Subsidy Rationalization Initiative (SRI)? Though this could be bad news for aggregate consumption but it will be good news for our fiscal condition in 2025 and hence, investors sentiment in 2H24. As the sky is expected to be blue in 2025 thanks to better clarity on US’s policy path and Malaysia’s much better fiscal condition (fiscal deficit is likely to be in the region of 3.0%++ in 2025 thanks to SRI) will become the driver that will delight investors. Combination of factors will also drive the Ringgit higher, which is set to close its gap against its fair value. We have always maintained Ringgit fair value at RM4.20- RM4.30 per Dollar in the long run. Key risk is the full blown war in the ME, a prolong rebound in US inflation and bigger-than-expected impact to aggregate consumption as a result of SRI. The uncertain outcome of US presidential election may also bite.

No change to our 2024 year-end target of 1,720-points, though we will revisit this in our 2H24 strategy piece.

1Q24 Equity Market Analysis

• FBMKLCI reached its zenith in February (1,558.80-points) thanks to the excitement over US policy path which may see its first cut in 2 years. Reality bite, however, as US inflation proved tough to be tamed, lowering the expectation of investors and hence, FBMKLCI that ended the quarter at 1,536.07-points. It was a no-small-feat nonetheless, as the bellwether index clocked in a QoQ and YoY jump of 5.5% and 7.9% respectively in 1Q24.

• FBMKLCI could have shined in 1Q24 if not for the rapid profit taking activity post US’s March policy meeting. It was a volatile 1Q24 for the index following the quarter’s high of 1,558.80 (27th February) and a low of 1,453.10 (2nd January), close to 105 points difference compared to 51.24-points from peak-to-through in 4Q23. Investors could be encouraged by US’s expected policy cut, speculated to be as early as in March or May, only to be dashed, following US’s strong employment and inflation numbers. FBM Hijrah trailed the FBMKLCI form however following a QoQ and YoY jump of 3.8% and 6.5% which is not surprising given foreign investors penchant for financial stocks. Above all, we were witnessing a change in fortune for FBMKLCI following foreign institutional investors that accumulated an impressive RM2.3bn of Bursa Malaysia equities until 3rd week of March (note: net capital inflow) only to be reversed thereafter until the end of 1Q24. In total foreign investors was a net seller to the tune of -RM875mn in 1Q24, a slight improvement compared to -RM1.8bn for 1Q23 respectively. The heightened net selling pressure by foreign investors capped the rise in Ringgit which touched its bottom of RM4.7987 per Dollar on 20th of February.

• Investors sentiment in 1Q24 were, among others, dampened by the uncertainty over US’s policy direction and China’s economic trouble. The much anticipated reversal in US’s policy direction have either make or break sentiment. Indeed, the might of USD have hurt every country and therefore, the expected change in dynamics to temper that. Though it was an ideal situation where US central bank could lift the flag for its central bank to begin cutting its rate but taming inflation is never a straight forward game. At the heart of this is its strong labour market. To have a strong conviction to cut policy rate, US’s unemployment has to be on the way up but this has been a very slippery road or snail pace momentum, at best. Case in point is its monthly unemployment numbers that have stuck at 3.7% from November until January only to jump minutely to 3.9% in February before slipping back to 3.8% in March. At this stage, there is no certainty that US unemployment numbers may zoom above 4.0% steadily, let alone to reach US FOMC target of 4.5% anytime soon. Hence, the jittery sentiment over risky asset class. China did no justice to global equity market either given its trouble property market and local government that remained neck high in debt. To defuse the situation and boost the economy, China’s central bank has cut its 5- year loan prime rate by 0.25% to 3.95% in February, the largest in record. Above all, we are worry over inflation situation in China which has been in deflation mode since October, only to jump slightly to 0.7% in February (January: -0.8%), courtesy of rapid spending due to CNY. China’s inflation moderated back or to 0.1% in March. There is a danger that this could slip into deflation from April onwards.

• Ringgit oversold position remains a concern. It closed the quarter at RM4.7250 per Dollar, a further drop of 4.3% and 6.9% on QoQ and YoY basis. Ringgit was hammered by several risk factors including the strength of USD, China growth risk and challenging external conditions which hurt our exports for the most part of 2023 and into 2024. The current Ringgit position does not reflect our fundamentals however given a marked improvement in political condition, enviable growth potential, improving fiscal conditions. In sum, Ringgit was hurt mostly by external factors. Confidence over Ringgit is also highly influenced by the government’s reforms efforts which may bear fruits only in 2025.

• How did we fare against regional peers and regional benchmark 1Q24? FBMKLCI which expanded by 5.6% YTD outperformed SET (-2.7% YTD), STI (-0.5%), JCI (+0.2%), a laggard only to PSEi (+7.0%). It also thumped MSCI AP ex-Japan (+4.4%), the region’s benchmark index. The oversold condition in STI and JCI could bring a spillover effect to regional players like FBMKLCI and PCOMP which we expect to continue well into the rest of 2024. This is not reflected in the Ringgit form however amid Ringgit that drop 4.3% QoQ, comparative against regional peers like Singapore’s Dollar (-2.2%), Thailand’s Baht (-6.1%) Indonesia’s Rupiah (-3.0%) and Philippines’s PESO (-1.5%). It is imperative to highlight Ringgit’s lessthan-inspiring performance YTD which is both a concern and an opportunity.

• How about capital inflow into equity in 1Q24? How did Bursa Malaysia do compared to ASEAN-4 peers? On that score, Bursa Malaysia YTD equity capital outflows of -RM875mn (USD185mn; average 1Q24 Ringgit: RM4.7336 per Dollar) is a huge disparity compared to Thailand Stock Exchange significant outflows of -USD3.6bn though pale compared to an impressive inflow into the Philippines (USD450mn) and Indonesia (USD3.4bn). With challenging external condition and various shocks reverberating since early of the year, Bursa Malaysia delivered a ‘resilient’ form, in our view.

• FBMKLCI was also dragged by challenging economic performance amid its 2023 GDP growth of 3.7% that came in below the official target of 4.0%-4.5%. This jittered the market particularly when our Manufacturing PMI remained in contraction mode for the first 3 months of the year (January: 49.0; February: 49.5; March: 48.4).

• FBMKLCI ended 1Q24 at a PER of 14.6x, a 12.6% discount against a 10- year average of 16.7x (note: excluding COVID-19 years). Though FBMKLCI may benefit from the expected return of foreign investors, the momentum could be capped by an equally or more attractive regional peers position particularly for PSEi and STI though we can boasts with attractive position compared to SET and JCI (refer to Table 1).

• We foresee several uncertainties that could dampen trading sentiment, chiefly the US interest rate downcycle which has yet to start. US Federal Reserve penciled that they could begin cutting the FFR by three times this year though this has been marred by the recent drop in US’s March unemployment (3.8%; February: 3.9%) and the rise in inflations numbers (3.5%; February: 3.2%).

• Oil price, using Brent Crude as a benchmark, could remain northbound and test the USD100 per barrel level if tension escalates in ME. Brent, which has been trading below USD90 per barrel since February, surpassed the psychological level of USD90 per barrel in April no thanks to the escalation of tension in ME following Iran attack of Israel. Though there is no telling if the situation may get worsened but should that happen, Brent could be heading northbound and this will take a toll on global growth and by extension, sentiment against equity market.

• SRI: Will the Government or will they not? Much has been said about the government’s SRI including ‘when’ and ‘how’. We however must view this through the lens of the government which must correct the distortion in the economy. Subsidizing essential goods indefinitely is negative for the economy even if we are a net oil producer as they will have to confront revenue leakages, pollution and wastages. Having said that, the government is aiming to rollout SRI in 2H24 covering goods like petrol, diesel and chicken eggs, after the earlier ones like chicken (October 2023) and electricity (January 2024). Will the government or will they not bite the bullet on this? Our concern mainly stems from the possibility delay or worst, a complete abandonment to roll out this as this will dent the investors’ confidence.

• Nonetheless, we opine that investors will price-in the prospect of a lean government fiscal position from 2025 onwards, stable political condition, Ringgit competitiveness, moderation in US inflation in 2024/25, and the prospects of policy rate cut by Federal Reserve which could reach 75 and 50 bps in 2024 and 2025 respectively. On that score, we retain our 2024 year-end target of 1,720 -points.

Source: BIMB Securities Research - 18 Apr 2024