Bursa Malaysia shares staged oversold rebound last week, as investors returned to bargain hunt after the recent profit-taking spell, with utility, property and healthcare stocks leading recovery on hopes the ECB’s move to cut rates and softer US labour market will encourage the Federal Reserve to cut interest rates. The market remained upbeat ahead of the weekend on optimism the interest rate cut by the ECB and softening US jobs data will influence the US central bank to lean towards cutting interest rates by year-end.

For the week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) recouped 21.18 points or 1.33 percent, to 1,617.86, as gains on Tenaga (+72sen), Press Metals (+29sen), CIMB (+12sen) and Maybank (+7sen) overcame losses in Petronas Dagangan (-RM1.03) and Petronas Chemicals (-7sen). Average daily traded volume last week was lower at 4.95 billion shares as compared to 5.21 billion shares the previous week, while average daily traded value shrank to RM3.97 billion, against the RM4.45 billion average the previous week.

The interest rate cuts by Canada and the European Central Bank last week have intensified speculations that the US Federal Reserve could probably follow suit, not in this week’s meeting or next month but in September. ECB’s decision last Thursday came hot on the heels of Canada’s cut a day earlier, which placed it the first G7 nation to ease in the current cycle. With the US labour data last Friday still pointing to a vibrant jobs market, investors should be crossing their fingers to hear more from the US central bank when the monetary policy makers meet this Tuesday and Wednesday.

On a separate note, contrary to the US, investors should be hoping for a stronger price pressure when China releases its consumer price index and producer price index for May this Wednesday. A stronger data will reflect improving domestic demand after external trade disappointed for some time, although the May trade data last Friday showed exports rose 7.6% YoY, higher than forecast 5.7%, while growth in imports narrowed to 1.8% YoY from April’s 8.4% and forecast 4.3%. The outperformance could be due to stocking up exercise in the US ahead of its steep tariff increases on an array of Chinese imports including electric vehicle batteries, computer chips and medical products that will take effect on 1st August.

Back to the US, its nonfarm payrolls report for May that came out last Friday showed an increase of 272,000 jobs, much higher than the Wall Street consensus forecast of 190,000 and April’s 165,000. Despite unemployment rate rising to 4% YoY from 3.9% YoY in April due to the number of people holding jobs fell by 408,000, the average hourly earnings rose 0.2 percentage points to 4.1%. Consensus were expecting both the unemployment rate and wage growth to remain at 3.9% YoY.

The stronger than expected labour data should sustain the Fed’s “higher for longer” interest rate narrative in this week’s meeting while market wait eagerly for the central bank’s economic projections and inflation data for May that will be released on the same day. Probability for a rate cut in September continues to drop with the CME Fed WatchTool indicates almost an even chance of 50.5% last Saturday versus 65.7% a month ago. If the economy remains strong, inflation stalls at current level and labour market does not show any signs of drastic weakening, the Fed could hold on to current interest rate level for the rest of the year. While this could sustain the USD’s strength and the Ringgit’s relative weakness, we believe the Malaysian equity market has its own plus factors that should contribute to its revival in the 2H24 and next year.

At last week’s close of 1,617, the FBMKLCI is trading at an attractive CY25 PER of 13.4x, a huge discount to its last five years’ average of 17.4x. This discount should narrow gradually as investors get attuned to the facts that the economy is improving (TA forecast 4.7% in 2024 versus 3.7% in 2023); corporate earnings will see a strong double-digit earnings growth this year (TA forecast: 17.1% and 8.6% for stocks under our coverage universe and 17.0% and 7.1% for the FBMKLCI in CY24 and CY25, respectively); sizeable public spending and foreign direct investment inflows in growth sectors will have positive spillover effects on domestic direct investment, economy and corporate earnings; the government’s commitment towards domestic fiscal consolidation and structural reforms will improve the nation’s fiscal deficit to below 3% in the next three to five years as outlined in the Fiscal Responsibility Act; and these factors should woo back foreign investors whose shareholding is still low at 19.6% as at end May 2024.

The government’s decision to remove diesel subsidies for selected segments of the economy effective today was in-line with its widely communicated guidance since last year. However, the removal of subsidies at one go was contrary to market expectations for a gradual increase. The new diesel price of RM3.35 per litre at fuel stations in Peninsular Malaysia from June 10, 2024 midnight will save the government RM4bn/year. Nonetheless, a total of 33 types of public and goods transport vehicles will continue to enjoy subsidised diesel through the use of fleet cards under the Subsidised Diesel Regulation System. We believe the total removal of subsidies will provide the government better control in monitoring the impact on price of goods and services in the economy than gradual increases and limit traders’ ability to increase prices multiple times if a gradual approach is taken. The next million-dollar question is whether a similar move will be taken for petrol subsidies or a gradual approach will be taken as the implication will be greater on consumers.

Following this increase, our economics team estimates inflation will increase by 3.3% YoY in 2024 versus our initial projection of 2.9%. This could surge further if a similar increase is imposed on RON95. The consumer discretionary and auto stocks may see kneejerk selling today following the increase in diesel prices. Nonetheless, we anticipate the impact to be temporary given the shielding effect from the withdrawal of EPF account 3 and the impending 13% salary hike for civil servants this December.

Thus, we maintain any weakness in the market should be regarded as a good opportunity to go long on undervalued blue chips, domestic sectors and companies that will benefit from selective themes. Improving economy and anticipation of a pickup in foreign buying are positive for index heavy banks like ABMB, CIMB and PBBANK on the back of improving loan growth, stabilizing NIM and rising fee income, Technology (INARI), Telco (TM) and Power (TENAGA and MALAKOF) players should ride on the demand created by digital economy, new technologies and the mushrooming data centres.

While some Property players have also jumped into this datacentre bandwagon, which will provide them a decent recurring income, they also should benefit from the improving labour market and low interest rate apart from the huge inflow of FDIs that should increase demand for industrial land and properties. Buy SIMEPROP, IOIPG and IBRACO. Ibraco, although relatively a small company, we like it for its Sarawak exposure.

Construction (SUNCON and INTA) sector will ride on the same wave due to provision of various related infrastructure, in addition to the huge public spending under various long-term plans such as the National Energy Transition Roadmap. Improved domestic activities, higher consumption, incentives from the government for the B40 group, increase in civil servants pay, withdrawal from EPF account 3 and the robust tourist arrivals are positive for the Consumer (AEON, PADINI and FOCUSP) sector. Small cap Healthcare stock (DPHARMA) will benefit from government contracts and an expected turnaround in the consumer healthcare segment, while SCOMNET will benefit from a recovery in demand for its medical and automotive products. Building Material player PGF is enjoying strong demand for its building insulation materials that contribute to a reduction in carbon emission. Possibilities of China investment in Tanjung Malim, where it owns 1,311 acres of development, is an added catalyst although nothing is conclusive now.

Source: TA Research - 10 Jun 2024