Potentially a Mixed Week

The local stock market ended the first trading week of 2024 with a bang, with the local bluechip benchmark index breaking out to close at a fresh 12-month high. The local market ignored corrections on regional markets, which were led by tech stocks on valuation concerns, as the utility, construction, property and rubber glove sectors led gains on optimism over domestic infrastructure spending fuelling economic growth.

For the first week of the year, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) rallied 32.95 points, or 2.27 percent to 1,487.61, with most gains coming from YTL Power (+68sen), Tenaga (+46sen), YTL Corp (+33sen), Maybank (+17sen), CIMB (+15sen) and Axiata (+18sen). Average daily traded volume last week surged to 5.88 billion shares, compared to 3.78 billion shares the previous week, while average daily traded value climbed to RM3.17 billion, against the RM2.34 billion average the previous week.

Last week’s buying momentum in the local bourse could sustain in the early part of this week as investors take cue from the resilient US equity markets that closed higher last Friday despite continued easing in expectations for an interest rate cut in March. Profit taking interest could increase towards the weekend as investors take some of their investment gains off the table while waiting for the outcome of Taiwan’s election this Saturday and China’s reaction.

Despite weakness in the early trading hours after a stronger than expected December nonfarm payroll report, the US equity indices ended higher on Friday. Nonetheless, major indices like Dow Jones, S&P 500 and Nasdaq Composite fell 0.59%, 1.52% and 3.25% to 37,466.11, 4,697.24 and 14,524.07, respectively on a week-on-week basis as investors cashed in on their gains. The US nonfarm payroll report last Friday showed employers hired 216,000 workers in December, average hourly earnings increased 4.1% year-on-year (YoY) while the unemployment rate of 3.7% was unchanged from the prior month. Bloomberg consensus estimates pointed to a job growth of 175,000, average hourly earnings growth of 3.9% and an unemployment rate of 3.8%. The stronger than expected labour data has reduced the probability of a 25-basis point interest rate cut in the Federal Reserve’s March meeting to 62.3% from 73.4% a week ago.

Continued strength in the US economic data could tilt expectations for a rate cut to May from March and hold sway over the USD index, which has been hovering around the 102- level since the beginning of this year. Nonetheless, this should not derail our expectations for the Ringgit to strengthen towards RM4.25 against the USD by the end of this year, underpinned by the eventual cuts in the US interest rate and improvement in the Malaysian economy (anticipate a GDP growth of 5% in 2024 versus forecast 4.0% in 2023) as domestic activities gain momentum, exports rebound, tourist receipts surge, foreign investments rise and fiscal deficits head further south, supported by various reforms and revenue enhancing measures. This should continue to attract net buying interest from foreign investors despite the short-term noises and propel the FBMKLCI towards our end-2024 target of 1,620.

That aside, Taiwan’s election outcome this weekend is of particular interest as the Chinese President Xi Jinping has struck a stronger tone last week by saying China’s reunification with Taiwan is inevitable. Recall that China has announced fresh sanctions on five American defence companies yesterday in a furious response to last month’s US arms sale deal worth USD300mn with Taiwan to upgrade the island’s tactical information system. The victory of a pro-independence party will heighten the ongoing tension between the US and China.

This Saturday, Taiwanese citizens will elect their new president and members of the Legislative Yuan. Since the incumbent President Tsai Ing-wen of the pro-independence Democratic Progressive Party (DPP) will not be contesting due to term limits, all eyes will be on DPP’s candidate Lai Ching-te, the current vice president of Taiwan who is leading in the opinion polls and regarded as a strong separatist by China. The other two candidates are Hou Yu-ih of the opposition party, the Kuomintang, and Ko Wen-je, chair and founder of the minor Taiwan People’s Party.

On the economic front, China’s trade data for December that will be released this Friday could provide some clues on Malaysia’s export recovery prospects. Malaysia’s November industrial production data this Thursday also will offer a glimpse of what to expect for the fourth quarter GDP. Meanwhile, the US is also due to announce its consumer price index for December on Thursday. Bloomberg consensus forecast is showing a slight uptick to 3.3% YoY from 3.1% YoY in November while the core CPI is expected to weaken to 3.8% versus 4.0% a month ago. The outcome will influence the rate cut narratives.

Source: TA Research - 8 Jan 2024