Investors on Tenterhooks Amid Middle East Turmoil, Foreign Selling and Spiking Yields

KLCI: 1441.0 (-2)
DOW: 33127.3 (-287)
MSCI Asia 152.8 (-1)
FCPO (RM): 3771 (13)
BRENT (USD): 91.9 (-0.28)
USDMYR: 4.768 (-0.0018)
SGDMYR: 3.475 (0.0029)
EURMYR: 5.049 (0.0199)
AUDMYR: 3.010 (0.0022)
GBPMYR: 5.781 (0.0068)
US: 10-yr yield (%) 4.91 (-0.08)
BNM:10-yr yield (%) 4.15 (0.01)

Asia/US. Mirroring extended selloff from Wall St, Asian markets fell amid surging US10Y bond yields (briefly tested 16Y high at 5%), the prospect of broader Israel-Hamas war escalation, Powell’s comment that inflation remains too high and monetary policy was not yet too tight, coupled with a prolonged property crisis and stalling economic recovery in China. The Dow tumbled 287 pts to 33,127 (-543 pts WoW), as headwinds from Middle East tension, Fed’s “higher for longer rates” narrative, the power vacuum in the HOR, and the threat of a US government shutdown next month, overshadowing a raft of current 3Q23 earnings optimism. This week, attention will be focused on advanced 3Q23 GDP growth, the PCE Price index, S&P Global PMI and housing market health reports. Earnings wise, a flurry of report cards will be due, with major players like Alphabet, Microsoft, Meta, Amazon, 3M, Coca-Cola, GM etc.

Malaysia. Tracking lower Wall St and regional markets coupled with sliding RM to 25Y low (vs USD) at RM4.77, KLCI eased 1.6 pts at 1,441 (-3.1 pts WoW), while market breadth deteriorated further to 0.56 vs 0.66 previously. Foreign institutions extended their selling spree for a 6th consecutive session (-RM98m, Oct: -RM1.77bn, YTD: -RM3.74bn) whilst the local institutions (+RM83m, Oct: +RM1.8bn, YTD: +RM4.4bn) and local retailers (+RM15m, Oct: -RM35m, YTD: -RM0.66bn) emerged as major net buyers.

Outlook We expect KLCI to consolidate further, as sentiment is likely to be dampened by the Middle East crisis, sliding RM (vs USD), a resumption of foreign selling in Oct (MTD: -RM1.77bn; 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 - 23 Oct 2023