Downside Pressure Persists Ahead of Trump Presidency and PreCNY Profit Taking

The FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) suffered from an early selloff last week due to continued foreign selling as the prospect of U.S. interest rates remaining higher for longer propped up the dollar and diverted capital flows to the U.S. The local blue-chip benchmark then briefly rebounded on bargain hunting interest in construction and technology stocks after government officials formalised the JohorSingapore Special Economic Zone deal. However, it subsequently fell back into profit taking correction mode as growing concerns of inflation in the U.S. and further delay in rate cuts by the Federal Reserve weighed down investor sentiment.

Week-on-week, the FBM KLCI fell 27.05 points, or 1.66 percent to 1,602.41, as dips on YTL Corp (-25sen), Petronas Dagangan (-RM1.36), Axiata (-16sen), MISC Bhd (-40sen) and Petronas Chemicals (-24sen) outweighed gains on Gamuda (+30sen) and CIMB (+7sen). Average daily traded volume last week grew to 3.4 billion shares versus 2.82 billion shares the previous week, while average daily traded value rose to RM2.87 billion, against the RM2.25 billion average the previous week.

Investor sentiment is expected to remain subdued this week, underpinned by China’s weak economic data and uncertainties surrounding the US trade and foreign policies postinauguration of President-elect Donald Trump next Monday. These factors are likely to impact US inflation and monetary policy, exerting downside pressure on global economic growth. China could provide more clues on impending policy moves this year following the announcement of key economic data for December this week. This includes trade data, industrial production, retail sales, and fixed asset investments, along with the much-awaited 4Q24 GDP. Bloomberg consensus points to a growth of 5% YoY and a full-year expansion of 4.9%, slightly lower than the official guidance of 5%.

Meanwhile, in the US, the strong and stable labour market should keep worries about Trump’s policies stoking inflationary pressures alive. The US economy added 256K jobs in December 2024, the most in nine months, following a downwardly revised 212K in November. This was stronger than the Bloomberg forecast of 165K. The impending US CPI, PPI, and Beige Book announcement this week could shed more light on price pressures and the state of the economy.

Locally, the Department of Statistics’ advanced estimate of Malaysia’s 4Q24 GDP is due this Friday. Consensus expects it to grow by 4.8% YoY in the quarter, leading to a stronger fullyear growth of 5.1% versus 3.7% in 2023. This aligns with our view that it will expand at a softer pace of 4.7% in the final quarter versus 5.3% in 3Q24 and full-year growth of 5.0%, driven by growth in all economic sectors and a strong pickup in consumption and investments. This strong momentum is expected to spill over into 2025, and we expect fullyear growth to fall within our forecast range of 4.8% to 5.3% versus the government’s official forecast of 4.5% to 5.5%. Our forecasts for 2024 and 2025 and the drivers are summarized in Figure 1.

Against this backdrop, foreign investors may continue to offload after a net outflow of RM4.2bn last year and RM0.5bn in the first six trading days of this year. Meanwhile, local funds are expected to continue their buying support in anticipation of stronger domestic activities driving corporate earnings growth and potentially attracting back foreign interest upon more clarity on US policy post-inauguration of the new president. Thus, focus could remain on domestic plays as investors take solace in significant government spending under Budget 2025 and rising investments to navigate current uncertainties. Retailers, on the other hand, could lock in their profits ahead of the Chinese New Year (CNY) festive celebrations.

Historical records from 1991 show that the probability of profit-taking in the last two weeks prior to the Chinese New Year (CNY) is 55.9%, with an average correction of 1.9%. Meanwhile, the probability of a rally in the two-week period after CNY is 67.6%, rising to 73.5% and 70.6% after one month and three months, respectively, with average gains of 3.9%, 4.2%, and 7.0%. The strong performance post-CNY could be driven by the return of retail investors and stronger buying interest from local institutions, aided by traction in corporate earnings growth as the fourth-quarter results reporting season concludes in February. It could also be due to investors positioning themselves to qualify for final dividends.

Source: TA Research - 13 Jan 2025