US Rate Cut Optimism Should Sustain Buying Momentum

Bursa Malaysia shares ended modestly higher last week, with profit-taking in core plantation and oil & gas heavyweights offset by keen bargain hunting interest in construction, property and banking stocks amid optimism over data centre and infrastructure deals. Increasing hopes for US interest rate cuts towards the year end as inflation cools also helped improve market undertone.

For the week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) added 8.04 points, or 0.5 percent, to 1,619.06, with gains on Sime Darby (+12sen), Sunway Berhad (+16sen), CIMB (+18sen) and QL Resources (+16sen) offsetting falls in YTL Power (-28sen), Petronas Dagangan (-60sen) and Axiata (-8sen). Average daily traded volume last week was a bit higher at 4.85 billion shares versus 4.76 billion shares the previous week, while average daily traded value improved further to RM3.92 billion, against the RM3.5 billion average the previous week.

Signs of further improvements in the domestic economy, high likelihood for a rate cut in the US in September, the resilient China’s economy and possible appreciation of the ringgit versus the US dollar can act as strong catalysts to maintain investors’ buying interest in the local scene, especially foreigners who have tuned net buyers again in the last two weeks.

The advanced estimate of Malaysia’s 2Q24 GDP is due this Friday, a day after the release of Malaysia’s trade figures for June. Consensus is expecting exports to grow by 3.3% while imports surge 16.3% YoY, leading to a trade surplus of RM13.3bn in June versus a YoY growth of 7.3%, 13.8% and a surplus of RM10.1bn, respectively in May. Nonetheless, these forecasts allude to a minor 0.1% and 3.1% MoM decline in exports and imports, respectively. Apart from a higher base last year, the fact that China’s imports also unexpectedly contracted by 2.3% YoY versus a forecast expansion of 2.8% YoY could be one of the reasons for the weaker growth expectations. China reported a stronger exports growth of 8.6% YoY in June versus forecast 8% due to front-loading activities by manufacturers in anticipation of higher tariffs imposed by China’s trading partners.

The slower YoY expansion in Malaysia’s exports can be cushioned by a much stronger demand for semiconductor related products in the 2H24, supported by proliferation of advanced technologies that demand miniaturised yet more powerful chips in greater volume. In a nutshell, we envisage continued recovery in trade figures, aided by improving external demand, especially for electrical and electronics goods, which are the pillars of Malaysia’s exports. A recovery in China's economy, as the government introduces more incentives to prop up domestic demand, and growing adoption of “China Plus One” strategy among global manufacturers are added catalysts. These factors have contributed to significant increase in the import of intermediate goods from last December to May 2024 as manufacturers ramp up production and stock up inventories to meet future demand.

Apart from better external demand, improved domestic activities are also expected to contribute to a stronger economy in the 2Q24. Market is expecting the advance gross domestic product (GDP) estimate to show an expansion of 4.6% YoY in the quarter versus 4.2% in the 1Q24. We will not be surprised if the final figure next month shows a much stronger expansion due to better domestic activities driven by a stable labour market, higher private consumption and investments, and the positive chain effects from increased tourist arrivals in Malaysia.

Externally, China will announce its 2Q24 GDP today. Consensus forecasts point to a slower growth of 5.1% YoY versus 5.3% in 1Q24 due to weaker domestic demand, which was reflected in its depressed consumer and producer price indices that stoked worries about deflation. The outcome should ignite expectations for greater measures from the government to revive consumption, boost private investments and revive the struggling property market.

In the US, the recent consumer and producer price indices for June have heightened expectations for the Fed to cut its interest rate in September, which will ease concerns about the negative effects of high interest rate on the economy if it is maintained for a prolonged period. While this is an encouraging sign, the muddying political scenario is a concern. Last Saturday’s failed attempt to assassinate former President Donald Trump, in Butler, Pennsylvania is a sign of growing intolerance and political divide within the country as speculations rise on the possibility of president Joe Biden dropping out of the presidential election in November against Trump. The shooting incident can turn out to be a blessing in disguise for the former US president as it could rally fence sitters and sympathy voters behind him.

Source: TA Research - 15 Jul 2024