The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) managed to climb up to a near two-year high last Friday, as bargain hunters returned due to the firm regional tone and despite the sharply weaker US 1Q GDP reading. Rotational buying into construction and rubber glove related stocks sustained trading interest, as investors shrugged off the ongoing geopolitical tensions between Israel and Iran and focused on the strong US corporate earnings and robust economic data in the region.

For the week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) gained 27.59 points or 1.78 percent, to 1,575.16, with most of the gains coming from YTL Corp (+43sen), Tenaga (+32sen), Maybank (+14sen), YTL Power (+40sen), Axiata (+20sen) and Public Bank (+6sen). Average daily traded volume last week slowed to 3.91 billion shares as compared to 4.24 billion shares the previous week, while average daily traded value was at 2.89 billion, against the RM3.13 billion average the previous week.

The US Federal Reserve (Fed) is widely expected to leave the interest rates unchanged when the policymakers meet tomorrow and the day after. Nonetheless, it will be interesting to know whether the central bank will stick to its recent “higher-for-longer” narrative on interest rate or mellow down a bit after the recent 1Q24 economic growth came in at 1.6% QoQ annualised rate, which narrowed sharply compared to 3.4% and 4.9% in 4Q23 and 3Q23, respectively. Judging from last Friday’s resilient March core personal consumption expenditure of 2.8% YoY (0.3% MoM) that mirrored February’s YoY performance but was higher than Bloomberg forecast of 2.7% YoY, the Fed is unlikely to blink.

Thus, there is no surprise in markets dialling back their expectations on Fed’s rate cut. The CME FedWatch Tool showed that the probability of a rate cut in July has dropped to 31.3% last Friday compared to 43.6% a week ago. Expectations for an easing in September remain but the probability has fallen to 57.4% versus 68.4% a week ago. Hence, the 0.49% uptick to 106.092 in the USD Index is not misplaced and will underpin Ringgit’s weakness and foreign selling in the local scene. There is also possibility for the Fed to lower its guidance for three rate cuts this year to two or less in the future if the US labour market remains strong and inflationary pressures persist. The US non-farm payroll and labour market data this week should shed more light on this.

Thus, to sustain last week’s uptrend, strong buying momentum and positive local market catalysts are crucial to contain worries about inflation, which could remain sticky downwards due to persistent geopolitical tensions that could flare-up anytime. For a start, sentiment this week could be dampened by the 3.5% YoY contraction in China’s industrial profit for March after a surge of 10.2% in the first two months of this year. As this is a wet blanket on the China’s economic recovery story, investors will be watching closely the release of both the official and Caixin Purchasing Managers’ Index this week.

While the resilient USD, strong earnings performance of US tech stocks and “China Plus One” strategy should revive buying interest in the local technology (Buy INARI (TP:RM3.55), MPI (TP:RM36.20)) sector, especially semiconductor related stocks, appetite for domestically driven sectors like construction (Buy GAMUDA (TP:RM6.18), INTA (TP:RM0.62), KERJAYA (TP:RM1.92), SUNCON (TP:RM3.21), TRC (TP:RM0.52)) and properties (Buy GLOMAC (TP:RM0.47), IOIPG (TP:RM2.79), MAHSING (TP:RM1.57), PARAMON (TP:RM1.47) and defensive plays in the utilities (Buy MALAKOF (TP:RM0.75), PETGAS (TP:RM0.20.60) and consumer staple (Buy CARLSBG (TP:RM22.90), HEIM (TP:RM28.60), AEON (TP:RM1.57), ABLEGLOB (TP:RM1.94), LHI (TP:RM0.67), QL (TP:RM6.70), KMLOONG (TP:RM2.50)) should persist. We also believe the value proposition in the benchmark index heavy banking (Buy AMBANK (TP:RM4.60), CIMB (TP:RM7.50), HLBANK (TP:RM23.30), PBBANK (TP:RM4.70)) stocks should drive interest from institutional funds as the domestic activities and exports rise, contributing to a better economic growth of 4% to 5% this year (government’s official forecast) versus 3.7% in 2023.

Source: TA Research - 29 Apr 2024