Lower Liners to Shine While Blue Chips Consolidate

Banking heavyweights led losses in another mid-week fall last week, amid worries the US Federal Reserve may opt to keep interest rates at current levels for a prolonged period to contain inflation. However, the Wall Street rally to record highs after the US central bank retained its call for 3 interest rate cuts before the end of this year helped spark rebound from the selloff. Moderate gains followed ahead of the weekend, led by property, construction and banking stocks, encouraged by the US Federal Reserve’s commitment on further interest rate cuts.

For the week, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) fell 10.44 points, or 0.67 percent, to 1,542.39, as gains on YTL Power International (+19sen),

YTL Corp (+10sen) and PPB Group (+46sen) were overshadowed by losses in TM (-47sen), Maybank (-12sen), CIMB (-6sen) and Public Bank (-3sen). Average daily traded volume last week increased mildly to 4.24 billion shares, compared to 4.18 billion shares the previous week, but average daily traded value dipped to RM2.83 billion, against the RM3.19 billion average the previous week.

The benchmark index is expected to continue with its sideway consolidation this week while waiting for more clarity on policy front not only from key economies like the US and China but also domestically as investors wait for more details on the impending luxury tax that is supposed to be implemented beginning May and the targeted subsidy cuts in the second half of this year. While blue chips are expected to extend sideways consolidation, rotational plays on lower liners, specifically in the construction, property and oil & gas sectors should highlight trading this week while the local market await more concrete catalysts to lift the broader market to higher ground.

The FBMKLCI failed to mirror the strong appetite for equities in the global financial markets after the US Federal Reserve kept its policy guidance largely intact even though recent inflation reading in the world’s largest economy came stronger than expected and it projects the economy to grow at a faster pace of 2.1% this year versus earlier projection of 1.4%. No doubt, the Fed’s aggressive monetary tightening between March 2022 and July 2023 has succeeded in lowering inflation from alarming levels and we believe more conclusive evidence of it moving towards the policy maker’s 2% target will emerge in the later part of second quarter as depleting savings and weaker wage growth versus inflation soften consumption. This is consistent with market expectations for the Fed to stay pat for the six consecutive time in May before relenting in the June meeting.

The US personal consumption index (PCE) and core PCE for February are due this week. While consensus is expecting PCE to rise slightly to 2.5% YoY from 2.4% YoY a month earlier, the core PCE, which is the Fed’s preferred gauge, is expected to remain at 2.8% YoY. A stagnant or weaker reading could sustain expectations for it to move lower in the coming months but a slightly higher reading may not come as a surprise given that a recent survey by the S&P Global showed that its measure of prices paid for inputs in March increased to a six-month high of 58.9 from 55.5 in February while the output prices gauge rose to 56.8, the highest reading since April 2023, from 54.1 in February. By the same token, the jobless claims that remained at historically low level and soaring existing home sales added to the view and inflation could remain high in the coming months. This could provide some breather for the US equity indices, which have hit new highs last week, and spillover to affect regional markets, including Malaysia.

That said, any downside pressure on the FBMKLCI will be capped by buying support from the institutional funds, especially the government-linked investment companies, as the government encourages them to repatriate funds from overseas and invest more domestically to support the local currency. Low foreign shareholding of 19.5% in Malaysian equities is another important gauge to indicate limited downside.

Source: TA Research - 25 Mar 2024