Nervous investors sold off on the local exchange yesterday, leading the FBM KLCI to close 13.89 points lower at 1,485.5.
PETALING JAYA: Revived appetite for risk assets amid expectations of the US Federal Reserve (Fed) downsizing the magnitude of its rate rises should support the upside in equities and the ringgit in the short to medium term, MIDF Research says.
Market expectation is for the Federal Open Market Committee (FOMC) meeting today to result in a smaller hike in the benchmark federal fund rate by 25 basis points (bps) after the 50-bps hike last December, as data reveals inflationary pressures are subsiding in the American economy.
“The Fed slowed the pace of its rate hike with the 50-bps increase in its Fed fund rate in the December 2022 FOMC meeting. Arguably with this, we can reason that we have seen the start of the awaited US Fed pivot,” the research firm stated in a thematic report yesterday.
Nervous investors, however, sold off on the local exchange yesterday, leading the FBM KLCI to close 13.89 points lower at 1,485.5.
While analysts and markets will eye the Fed’s comments for leads going forward, economic indicators such as the recent core personal consumption expenditure (PCE) price inflation (eased to plus 3.5% quarter-on-quarter) may compel the Fed to slow the pace of hikes to ensure a soft landing as concerns grow of a recession.
For the full-year 2022, the United States economy grew by 2.1% far better than the FOMC’s Dec 22 projection of 0.4% to 0.5% growth and largely underpinned by growing consumer spending, which covers more than two-thirds of gross domestic product (GDP).
This was enabled by a robust labour market leading many now to expect the Fed to raise the fed funds rate to the terminal rate of 5% at the FOMC meeting in March to ensure inflation eases towards its 2% target.
A more dovish stance from the Fed today will impact the US dollar which MIDF Research expects it to weaken in 2023 against emerging market (EM) currencies like the ringgit.
“We anticipate the growing demand for EM currencies will continue this year,” the research house said as the Fed moves into the pivot phase.
The foreign exchange market will also have its eye on new measures or policy action out of Putrajaya in the upcoming revised Budget 2023 to uplift the ringgit or at the very least buffer its downside should the global economy soften more than anticipated.
The expectation of the pivot has improved market volatility and trading volumes on Bursa Malaysia in January but the upside for the benchmark FBM KLCI could be limited as fund flow data showed foreign investors remained net sellers of local equity for the month.
They net sold RM201mil worth of stock year-to-date after turning net buyers of RM4.4bil worth of stocks in 2022, a CGS CIMB Research strategy report revealed.
The funds sold stocks like Hong Leong Bank Bhd
, CIMB Group Holdings Bhd and Malayan Banking Bhd in January which were mopped up by local institutions, although their net buying value fell 71.3% week-on-week to RM114mil last week pending the retabling of Budget 2023 on Feb 24.
Foreign shareholding of Malaysian equities fell 0.1% points month-on-month to 20.6% as at end December 2022 versus 20.4% as at end 2021 and peak of 24.2% in March 2018, the CGS-CIMB Research report noted.
Pending the pivot, left for dead growth stocks from sectors like tech, energy and transport appear to have attracted inflows from local and foreign investors following exits from plantation and finance counters which generally performed well in 2022.
“Investor interest is turning to lower liners with mid and small caps leading the upward charge with midcap FBM70 and FBM Smallcap recording gains of 5.7% and 8.5% year-to-date respectively, as compared to FBM KLCI advance of 0.1%,” MIDF Research stated.
