Bursa Malaysia shares eased into profit-taking consolidation last week as concerns over China’s slumping property sector and weakening economic growth, and potential further US interest rate hikes due to the elevated inflation data dampened market sentiment. Construction, property and utility stocks stayed firm on situational buying interest as investors reverted their attention to the eventual rollout of key infrastructure projects after the conclusion of the six state elections, which was within market expectations but saw the current unity government losing support in its traditional strongholds.

Week-on-week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) slipped 11.07 points, or 0.76 percent, to 1,446.09, as gains on Tenaga (+15sen), CelcomDigi (+3sen) and AMBank (+5sen) were overshadowed by falls in Press Metals Holdings (-21sen), Dialog Group (-12sen), CIMB (-6sen), Public Bank (-3sen) and PPB Group (-54sen). Average daily traded volume last week improved to 3.71 billion shares, compared to 3.06 billion shares the previous week, while average daily traded value recovered to RM2.18 billion, against the RM1.79 billion average the previous week.

The local bourse is expected to undergo further profit taking consolidations this week, pending clarity from external and domestic fronts, especially after Malaysia’s second quarter (2Q23) gross domestic product came much weaker than consensus expectations. The economy expanded by 2.9% year-on-year (YoY), versus our forecast of 2.8% YoY and consensus’ 3.3% YoY, and 5.6% YoY in the 1Q23, largely driven by the construction (+6.2% YoY) and services (+4.7% YoY) sectors. On the demand side, both exports and imports contracted at a faster pace of 9.4% and 9.7% YoY in the 2Q23 versus -3.3% and -6.5% YoY in the 1Q23 respectively but cushioned by growth in the final consumption expenditure and gross fixed capital formation. The weakness in trade perpetuated in July, as data released by the Department of Statistics showed both exports and imports contracted by 13.1% and 15.9% YoY, which led to a lower trade surplus of RM17.1bn versus consensus forecast of RM21.2bn and June’s RM25.8bn.

Subsequent to the announcement, Bank Negara said that the full year growth is expected to be closer to the lower end of its projected range of 4% to 5%. It will be supported by domestic demand amid improving employment and income, higher tourist arrivals and project flows post conclusion of the state elections. Being a trading nation, the expected slowdown in the global economy should remain as a major downside risk to this growth forecast. With the world’s two largest economies, the US and China facing many issues that could drag down the rest of the world, policy response from these nations in the immediate to short-term will remain as key focus. Currently, we are maintaining our forecast of 3.5% and 4.6% YoY growth for the 3Q23 and 4Q23 respectively, which will lead to a full year growth of 4.2%.

Anticipation of a potential soft landing in the US and the Federal Reserve “pausing” in its September meeting contributed to the recent equity market rally in the US and locally, but this expectation could change before the meeting if economic data remains strong, supported by the tight labour market and unwavering consumption.

China, which is already facing glaring weakness in its external sector and foreign direct investment, is seeing problems at home turning bad with property crisis widening, municipal debts rising and domestic demand hampered by increased unemployment, especially among the youths, and deflation. So far, reaction from the government remains subdued and raised doubts about its ability to achieve the official GDP growth target of around 5% this year.

Source: TA Research - 21 Aug 2023