Strong Buying Interest Crucial to Break Free From Profit Taking Consolidation

The local stock market ended the final trading week of 2023 on a whimper, with the lack of local market leads and most investors away for the Christmas and New Year holiday break forcing stocks into extended profit-taking consolidation phase. A mild window-dressing recovery attempt mid-week failed to sustain, as the absence of follow-through buying commitments on the last trading day of the year sparked a profit-taking pullback.

On the last week for 2023, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) ended flat at 1,454.66 (+0.28), as gains in Public Bank (+4sen), CIMB (+5sen) and Tenaga (+5sen) were offset by falls on Petronas Chemicals (-6sen), PPB Group (-22sen) and Axiata (-3sen). Average daily traded volume last week recovered mildly to 3.78 billion shares, compared to 3.68 billion shares the previous week, while average daily traded value decreased to RM2.34 billion, against the RM2.41 billion average the previous week.

No major economic data is due this week on the local front apart from the S&P Global Malaysia Purchasing Managers’ Index (PMI) Manufacturing for December, which is expected to remain below the expansion threshold of 50. In the absence of major leads locally, investors will be watching closely external events and economic data for direction this week after the FBMKLCI’s disappointing performance last week. In the US, the Federal Reserve’s meeting minutes, purchasing managers’ index (PMI) and labour data for December are due this week while China also will announce its PMI data.

A gradual decline in nonfarm payrolls and average hourly earnings growth in the US will be construed as continued easing of the US labour market and viewed positively. This data affects inflation and the Fed’s monetary policy decision and has bearing on market’s expectations for interest rate cuts in 2024. The CME Group’s FedWatch Tool indicates a strong probability of 72.8% for a 25-basis point cut in this March meeting. Continued easing in the US monetary policy is a vital driver for Ringgit’s appreciation against the USD and a revival in foreign net inflows into the Malaysian market this year.

On the other hand, any improvement in China’s PMI is a good sign for Malaysia’s exports, which have contracted last year. It will solidify consensus expectations of a stronger economic growth for Malaysia in 2024 versus forecast 4.0% last year. We are already witnessing robust tourist arrivals that will complement the stronger outlook as the domestic political stability pave way for greater reforms and vibrant economic activities. Exports and domestic activities are also expected to receive further boost from the “China Plus One” strategy and Malaysia’s long-term policies that are drawing in significant foreign direct investments and inducing higher domestic direct investments. As such, 2024 could be a better year for the FBMKLCI with the stronger economy and reforms underpinning revival in corporate earnings (consensus forecast is 11.7% in 2024 versus 3.2% in 2023) and foreign interest (19.6%).

The end-2024 target for the benchmark index is 1,620 based on a CY25 price-to-earnings ratio of 13x versus a 5-year (2019-2023) average of 17.5x. Meanwhile, downside risks could arise from the geopolitical tension, especially if the ongoing Israel-Hamas conflict escalates and leads to disruption in the supply chain and higher oil prices that will increase inflation and affect monetary easing decisions, a US economic recession, and a slower pickup in China’s economy. Key investment themes for 2024 would be 1) Digital Economy (TM), 2) Domestic Spending (AEON, GAMUDA, SIMEPROP, SUNWAY & WPRTS), 3) Foreign Buying of Undervalued Blue Chips (CIMB, HLBANK &, MISC), 4) Green Investment (MALAKOF & TENAGA), 5) Recovery Plays (DPHARMA & INARI), 6) Tourism Plays (AIRPORT & FOCUSP).

Source: TA Research - 2 Jan 2024