Sideway Trading to Persist as 2Q Begins

Blue chips stayed range bound during the final week of trade for the first quarter of this year, as investors were mostly sidelined while awaiting stronger cues from global central bankers’ guidance on inflation and interest rate direction. Profit-taking in plantation, telco and consumer heavyweights dragged the local blue-chip index lower mid-week, as market players stayed sidelined ahead of a local religious and Good Friday market holidays. The local market extended sideways trade ahead of the weekend, with most regional markets closed for the Good Friday holiday, and as investors await release of the key US PCE price index for inflation leads.

For the final week of March, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) slipped 6.32 points, or 0.41 percent, to end at 1,536.07, as mild gains on Maybank (+10sen), CIMB (+9sen) and Tenaga (+10sen) were offset by losses in CelcomDigi (-21sen), Axiata (-13sen), Maxis (-14sen), YTL Corp (-8sen) and PPB Group (-50sen). Average daily traded volume last week dwindled to 3.6 billion shares, compared to 4.24 billion shares the previous week, but average daily traded value stabilized at RM2.82 billion, against the RM2.83 billion average the previous week.

Given investors’ reservation regarding the timeline for lowering interest rates globally amid uncertainties in easing inflationary pressures, stocks are likely to extend sideways trade, pending more fresh market catalysts to breakout from current consolidation. Last Friday announcement showed the much-awaited US core personal consumption index rose 2.8% YoY and 0.3% MoM in February, versus 2.8% YoY and 0.4% MoM in January, matching the Bloomberg consensus forecast. Most importantly, the Federal Reserve Chair Jerome Powell said the data was within expectations and won’t be overacting to the last two months data. He said that there are no risks of a U.S. recession and will wait for more evidence that inflation is trending down before tweaking the interest rate but will respond if there is an unexpected weakness in the labour market. His comments are likely to sustain market expectations for a “higher for longer” interest rate outlook while investors digest the incoming data for the probable timing of the first interest rate cut in this upcycle. Thus. the nonfarm payroll report and average hourly earnings data this Friday will be followed closely to gauge the strength of the US labour market.

On the other hand, data from China last week showed that both the official manufacturing and non-manufacturing purchasing managers index (PMI) rose. The manufacturing PMI increased from 49.1 in February to 50.8 in March, the first time in six months, while the non-manufacturing PMI rose to 53 from 51.4 in the previous month. The Caixin PMI this week will most likely reaffirm the improving fundamentals, providing some hope that China will be able to deliver its official economic growth target of 5% this year, which is mostly viewed with some scepticism due to a high base last year and lack of details on expansion measures from the government.

These factors are likely to dominate market sentiment in the 2Q24 but we expect them to wither away by June as the certainty of a Fed easing increases to prevent a drastic economic slowdown and China revives consumption. Similar easing by major developed central banks should draw fund flows into the emerging markets as the yield gap narrows. Malaysia will benefit from trade and currency perspectives as exports recover and Ringgit strengthens vis- à-vis the USD. Prospects of higher domestic spending, political stability, inflow of FDIs, structural reforms and stronger corporate earnings add to the local equity market’s lustre, as the FBMKLCI is trading at consensus CY25 PER of 12.8x which is a steep discount its 5- year historical PER average of 17.6x. Thus, any price weakness in undervalued blue chips and fundamentally strong small and mid-cap stocks is an opportunity to accumulate.

Source: TA Research - 1 Apr 2024