Cautious Mood on Middle East Turmoil, Resumption of Foreign Selling and Spiking Yield

KLCI:    1442.7 (-3.9)
DOW:    33414 (-251)
FCPO (RM):    3728 (-30)
BRENT (USD):    92.4 (0.88)
USDMYR:    4.770 (0.023)
SGDMYR:    3.472 (0.005)
EURMYR:    5.029 (0.0123)
AUDMYR:    3.008 (-0.0195)
GBPMYR:    5.775 (-0.0151)
US: 10-yr yield (%)    4.99 (0.07)
BNM:10-yr yield (%)    4.12 (0.03)

Asia/US*. In line with overnight rout from Wall St, Asian markets closed broadly lower as sentiment was dampened by surging US10Y bond yields to 16Y highs, escalating turmoil in the Middle East as well as a prolonged property crisis and stalling economic recovery in China. The Dow slid 251 pts to 33,414 while the US10Y Treasury yield jumped 9 bps to 4.99% and Brent oil prices rallied 1% to USD92.3 as investors weighed escalating tensions in Middle East coupled with Powell’s further restrictive policy remarks. The Fed is proceeding carefully and will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, but the central bank would be “resolute” in its commitment to its 2% inflation mandate. On earnings front, over 75% beat expectations for the S&P 500 stocks that have already reported so far, and the 3Q23 earnings is expected to grow by 0.4% YoY, its first growth since 3Q22

Malaysia. Mirroring sluggish regional markets and a sliding RM (vs USD) to 25Y low, KLCI lost 3.9 pts at 1,442.7 while market breadth remained negative at 0.66 vs 0.43 previously. Foreign institutions intensified their selling spree for a 5th consecutive session (-RM135m, Oct: -RM1.67bn, YTD: -RM3.64bn) whilst the local institutions (+RM131m, Oct: +RM1.72bn, YTD: +RM4.32bn) and local retailers (+RM4m, Oct: -RM50m, YTD: -RM0.68bn) emerged as major net buyers. 

Outlook We expect KLCI to consolidate further, as sentiment is likely to be dampened by the Middle East’s turmoil, sliding RM (vs USD), a resumption of foreign selling in Oct (MTD: -RM1.6bn; 3Q23: +RM1.9bn) coupled with surging bond yields. Nevertheless, we reiterate our buy on dips stance to ride on a better 4Q23 (YE target: 1,530), underpinned by: (i) improved risk appetite post state polls and clearer political runway allowing the Unity Government to roll out its strategic plans and reforms; (ii) undemanding KLCI at 13.1x CY2024 P/E (vs 10Y average 16.6x); (iii) potential tail-end of Fed’s tightening; and (iv) the traditional year-end window dressing effect (92% positive hit rate in Dec since the GFC).

Source: Hong Leong Investment Bank Research - 20 Oct 2023