As all eyes this week will be on the US at the cusp of a rate decision, sentiment on broader equities will hinge not only on the extent of cut but more so on the US Fed’s outlook. Historically, and most of the time, US rate cuts have been positive on the FBM KLCI. Even so, we highlight opportunities in sectors that may enjoy knock-on benefit from US rate cuts, post recent sell-downs. Fundamental-wise, in addition to restoring sentiment, we see a demand fillip in oil and gas names (DAYANG, WASCO, DIALOG). From market interest standpoint, we see reasons to selectively add big cap banks for leverage on foreign interest amid local rates stability (PPBANK). Similar interest in the government bonds space may push down bond yields sufficiently for the REIT sector to begin to re-rate as well from yield spread differentials (SUNREIT, PAVREIT).
US rate cuts had been positive to the local market, most of the time. The US will deliberate on a rate decision this week, with a widely accepted view of a pivot in the September meeting. Examining the impact to the FBM KLCI - after a US rate cut, it has most of the time proven benign or positive. Out of the past 10 rate cuts, only on three occasions did the local market stay in negative index return territory over a 12-month horizon, two of which were during the Global Financial Crisis, and Covid-19 pandemic (see Exhibit 1). The median return over a 12-month period post a US rate cut is 8%.
Watching guidance. Policy rate pivot in US will be set in motion and latest data, per CME Fed Watch, show higher probability now for a 50 bps rate cut (versus our expectation of 25 bps), although the bigger determinant to how the markets may react could hinge on forward indications on the health of the US economy including its employment market. The yield curve in the US has started to normalize in its shape from an inverted yield curve (where short-term rates exceeded long-term rates). Over the next few months, we expect some volatility to prevail as investors monitor the effect high rates has had on the economy. To us, the fact that yield curve staying inverted for a relatively long period versus past episodes (see Exhibit 2) may mean the US economy has had longer time to be accustomed to the rate environment, thereby parrying away some concerns of a recession.
Malaysia has been reaping inflows.... Thanks to the strong signal by BNM that the central bank is not having to follow the US rate moves, but hinging more on local dynamics, this should have contributed to fund interest in Malaysia. Anecdotally, we have seen inflows in both bond and equities market in both July and August. As highlighted by the economics team with foreign bond inflows of RM9.0b, highest since July 2023, came on the heels of a good July print of RM7.8 bn (8M24: RM17.7b inflow). We also saw close to RM4b of inflow over the same period in equities. Economics team foresees BNM keeping rates steady into 2025 at 3%, and for the USD/MYR to clock in at 4.10 by end-2025 (versus Bloomberg consensus: 4.3%).
…but some sectors have not yet recovered. While there was net interest into Malaysia, some of the typical cyclical sectors have not recovered fully since the heavy sell down on 5 August 2024 that was precipitated by concerns over the US economic health. Selected structural stocks in the utilities space, as well as healthcare names, such as IHH, has done well. However, in terms of price-to-earnings valuations multiple wise, technology and oil and gas sectors saw their multiples declining (exhibit 3); notably for the latter which is close to decade-low valuation territory based on Bloomberg data.
US rate cut decision may provide fillip to certain sectors. Upon the rate cut decision, the more immediate spotlight would likely be on: (i) global demand recovery (positioned mainly via oil and gas), (ii) REIT as an attractive alternative to bonds, and (iii) flows into Malaysian market via large cap banks, elaborated below.
Source: Kenanga Research - 19 Sept 2024
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PPB2024-09-25
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IHH2024-09-25
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WASCO2024-09-25
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CIMB2024-09-24
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PPB2024-09-23
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DIALOG2024-09-23
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IHH2024-09-20
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PPB2024-09-19
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DAYANG2024-09-19
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DIALOG2024-09-19
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IHH2024-09-19
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PAVREIT2024-09-19
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PPB2024-09-19
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SUNREIT2024-09-19
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WASCO2024-09-19
WASCO2024-09-18
CIMB2024-09-18
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DIALOG2024-09-18
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IHH2024-09-18
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PPB2024-09-18
SUNREIT2024-09-18
SUNREIT2024-09-17
DIALOG2024-09-17
IHH2024-09-17
PPB2024-09-16
PAVREITCreated by kiasutrader | Sep 24, 2024
Created by kiasutrader | Sep 23, 2024