Aggressive foreign fund purchases in telcos, banking and utility heavyweights last week helped lift the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) back up to four-year highs, as investors took heed of the US Fed Chief’s dovish views on the US economy. Stocks dipped for profit-taking pullback on weakness in key regional technology names after Nvidia’s results underwhelmed investors, but then staged strong comeback ahead of the weekend, led by key utility, technology and consumer heavyweights, as a stronger US second quarter GDP reduced recession fears.

Week-on-week, the FBM KLCI jumped 43.06 points, or 2.63 percent, to 1,678.80, as gains on CelcomDigi (+33sen), Maxis (+28sen), Tenaga (+92sen), Public Bank (+29sen) and IOI Corp (+23sen) overcame falls in YTL Power (-25sen), YTL Corp (-18sen) and Sime Darby (- 15sen). Average daily traded volume last week moderated to 3.52 billion shares versus 3.73 billion shares the previous week, but average daily traded value rose to RM4.13 billion,

against the RM3.53 billion average the previous week, thanks to increased trading interest in utility and banking heavyweights.

Following last Friday’s strong comeback from a steep profit-taking correction sparked by aggressive foreign fund buying in key utility, banking and consumer heavyweights, further upside bias for the local market is expected.

Foreign funds continued to flow in and drive up the local equity market last week and the daily net inflow of RM646.8mn last Wednesday surpassed the previous Monday’s high of RM574.9mn. It was the highest daily inflow after hitting RM818.7mn on 17 March 2017. The momentum appears sustainable with Malaysia’s improving fundamentals, political stability and undemanding equity valuation (consensus CY25 PER of 14.2x versus 5-year historical average PER of 17.6x) attracting foreign funds amidst a weaker outlook for the US dollar in anticipation of a monetary easing cycle by the Federal Reserve beginning this month. The lower liner construction, oil & gas, and semiconductor related counters, which suffered sharp corrections recently should attract more bargain hunters looking to buy for oversold rebound upside.

Last Friday, the much-anticipated US personal consumption expenditures index for July came on the dot with market expectations of 0.2% MoM and 2.5% YoY while the core PCE rose 0.2% MoM as expected but the YoY expansion of 2.6% came slightly softer than forecast 2.7%. The data points to a strong likelihood for 25 basis points cut in interest rate this month and the impending non-farm payroll data this week should affirm it. Market is expecting hiring to increase by 160,000 in August versus 114,000 the previous month while the unemployment rate to ease to 4.2% from 4.3%.

Locally, Bank Negara Malaysia is scheduled to meet this Thursday to decide on its Overnight Policy Rate. We expect the policy rate to be maintained at 3.0% not only in this meeting but also for the rest of this year to accommodate economic growth on the back of still low headline inflation rate of 1.8% YoY in the first seven months of this year. No doubt there should be some uptick in inflationary pressures in 2H24 due to the rationalisation of diesel subsidies but the impact appears manageable after the government implemented measures to minimise the impact.

With the RON95 subsidy cuts appear off the table until next year, the headline inflation is likely to fall within the central bank’s broad range of 2.0% to 3.5%. The government is likely to implement it next year after the salary adjustment for civil servants this December and a possible hike in minimum wages next year (would not be surprised if it raised from RM1,500 to RM1,800 on the back of improving economic outlook and rising cost of living). More details on this are likely in Budget 2025 but the fact remains that the outlook for private consumption remains robust next year and will contribute to economic resilience. It will be supported further by public spending and private investments that should translate into better corporate earnings and greater interest in local equities.

Thus, while we reckon our end-2024 target of 1,690 could be surpassed soon, we are not perturbed by it as we have been indicating for some time that the FBMKLCI is in the midway of a major bull cycle and should break above 2,000 points before the next general election. However, while the trajectory is intact and the timing may vary a little, we do foresee some downside volatility emerging from external factors, especially geopolitical tensions and a weaker than expected expansion in China’s economy. Any weaknesses should be viewed as a buying opportunity.

Source: TA Research - 2 Sept 2024