Investors watch for clues

Despite the weak earnings season, the FBM KLCI appears to have found support at the 1,450-point level from the revised 2023 budget that remained expansionary with a fiscal consolidation target. — Bloomberg

PETALING JAYA: Investors will look to central banks this month for leads as sticky inflation in developed markets amid slowing growth raises concerns of stagflation more so if crude oil prices head higher driven by demand from China’s reopening.

As Jerome Powell goes to Washington to brief Congress this week, analysts say if the Federal Reserve (Fed) chair remains hawkish and raises rates by more than the consensus 25 basis points (bps) later this month, that could push the “pivot” back into 2024 and be bearish for market sentiment, as higher rates become real competition for stock returns.

Vice versa, a dovish Fed will be bullish for markets more so if a soft landing remains possible.

“A more dovish US Fed would be positive to the overall market (valuation view point) which the FBM KLCI has the tendency to follow suit as well.

“On top of that, a dovish Fed implies peak US dollar strength, and hence fund flows may then flow into Asian markets (including Bursa Malaysia) with better growth outlook and currency position (higher possibility of appreciation versus the greenback),” said Nixon Wong, chief investment officer at Tradeview Capital Sdn Bhd.

Local equity investors will also look to Bank Negara for leads tomorrow after a poorer fourth quarter (4Q22) corporate earnings season, as most companies experienced a higher operating cost environment while exporters suffered from forex losses.

“Earnings expectation has been revised downward following the weak 4Q22, and 1Q23 could potentially be a recovery quarter (from a lower base in 4Q22) driven by healthy consumption domestically (post-budget) and fairly stable economic activities,” added Wong.

Standard Chartered Research for one expects Bank Negara to hold its policy rate (OPR) at 2.75%, as the central bank assesses the impact of cumulative past rate hikes and as inflation moderates with the help of subsidies still in place.

“We will watch for how Bank Negara’s assessment of the domestic growth and inflation outlook has evolved over the past month.

“While the central bank paused in January, the tone of the accompanying monetary policy statement was not dovish. Bank Negara had a positive assessment of the domestic economy and left the window open to further hikes,” it noted in a report.

The research outfit maintained its call for the central bank to hike the OPR preemptively by 25 bps to 3% in May, ahead of a potential fuel subsidy rationalisation in the second half of the year which may exclude the top 20% (T20) income group, and forecast to add a 0.5 percentage point to inflation annually.

Meanwhile, the unexpectedly strong economic data out of the United States has seen the ringgit weakening to RM4.47 against the US dollar, which could provide some upside earnings potential (on currency gains) for local exporters in the current quarter, Wong said.

Nonetheless, the higher electricity tariff for companies could weigh on earnings potential, especially the manufacturing sector, as companies like PPB Group Bhd have warned off.

Despite the weak earnings season, the FBM KLCI appears to have found support at the 1,450-point level from the revised 2023 budget that remained expansionary with a fiscal consolidation target.

Unfortunately, the index’s chart reveals the topside capped at the 1,500-point level which Wong believes could be challenged by central banks policy action and the outcome of the state level elections due by mid-year.

The Opposition’s claim of working to topple the current government has revealed an unresolved political risk and weak point for the local market.

Foreign funds were net sellers in the local market to the tune of RM656mil year to date, according to CGS-CIMB Research.

CGS-CIMB Research thinks this could be due to investors likely focusing on government policies to tackle cost of living, upcoming Umno polls this month, and the six state polls likely in June and the government’s plans to introduce more targeted subsidies.

“While sticking to the ‘higher-for-longer’, but in 25-bps increments, it would help keep rates contained and oil markets relatively supported,” said Stephen Innes, managing partner at SPI Asset Management.

Innes added China’s reopening should support higher oil, but the Fed might have the last word on just how high oil prices could go, especially if US economic data runs hot and inflation remains high.

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