All eyes on Fed and China

Trident Analytics' Lim said the 1,400 point level for the FBM KLCI appeared to be quite a solid psychological support level.

PETALING JAYA: Investors should look to the US Federal Reserve (Fed) monetary stance and the health of China’s economy for leads on the likely trajectory of the local equity market.

Analysts said the macro environment would continue to influence the movements of the FBM KLCI until at least the quarterly results season in May.

It was a big week for markets and investors should consider following the “don’t fight the Fed” edict, as chairman Jerome Powell raised the funding cost in the United States by another 25 basis points (bps) and laid out the base case of no pivot in 2023, just as the dust settled on what threatened to turn into a banking crisis after a couple of smaller US regional banks went bust.

He also signalled the rate hike cycle may be at an end with analysts anticipating another 25 bps in May to take the Fed fund rate to 5% to 5.25%, after which emerging markets (EMs) such as Bursa Malaysia could see some upside, barring major shocks.

“I think Powell has moved into neutral mode rather than a hawkish or dovish stand with the recent hike.

“We may see another small hike or a pause in the rate hike cycle moving forward, which should not come as a surprise and is actually part of the Fed’s strategy to lower inflation,” said Peter Lim Tze Cheng, chief research officer at Trident Analytics.

While investors assumed the Fed was remaining hawkish and sold off on US markets, Asian markets proved more resilient with the FBM KLCI ending one point lower at 1,410 yesterday.

Lim said the recent weaker phase for the local equity market was due to concerns over the health of the banking sector globally and the risk it could have on the real economy.

Although the contagion risk has been ring fenced for now, investors remain cautious.

“The macro environment will drive movements of the FBM KLCI, until our local corporate results season in May.

“We are closely watching the development in China as any sign of positive economic recovery and stimulus in the republic is likely to benefit the overall Asia region and trading partners including Malaysia and in extension, Bursa Malaysia,” said Nixon Wong, chief investment officer at Tradeview Capital.

China’s economy is forecast to grow by 5% this year while the US economy could fall into a recession due to the past rate hikes.

Last week, in a media briefing, analysts at Rakuten Trade had also suggested Bursa Malaysia’s low current valuation of about 12 times the price-earnings multiple for 2023 was partly due to the withdrawal of foreign funds from the market, since the Covid-19 pandemic outbreak.

However, getting the outflows to reverse might not happen so soon.

A recent Fitch Ratings report stated that the Fed’s tightening action would weigh heavily on net capital flows to EMs this year.

The rating firm only expects flows to recover in 2024 as the Fed begins to cut policy rates and EM growth, relative to advanced economies improving.

Its study of nine EMs (minus China and Russia) found net flows recovered strongly in the aftermath of the 2008 to 2009 global financial crisis reaching a peak of close to US$430bil (RM1.9 trillion) in mid-2011, before slowing to around zero by early 2016.

Net flows then trended sideways before turning negative last year as the Fed tightened policy rates.

By flow type, the largest decline in recent years has been in equities, accompanied by increased volatility in bank flows and weak portfolio debt flows.

In contrast, foreign direct investment flows have remained fairly steady at US$120bil to US$140bil (RM535bil to RM624bil).

The rating firm noted its forecasting model showed any recovery in net flows this year would be driven by higher growth differentials (between EM over developed markets), but offset by tighter monetary policy and risk aversion.

The situation could be complicated by the fact that Asian central banks are much nearer to the end of their tightening cycle and could engage in a dovish pivot much sooner because the inflation picture was not as alarming.

Policy action is set to be determined by domestic concerns as Bank Negara’s recent monetary policy meeting outcomes have suggested.

Disinflation is starting to appear in some economies such as Thailand and Vietnam.

Lim said the low valuation for the local market was partly due to local institutional investors holding cash due to market uncertainties.

Wong said the outcome of the state level elections by June could determine local investor sentiment going forward.

“A clear and favourable result of the elections could provide more stability to the political landscape, thus implying lesser political risk.

“This will thereby pave the way for current Prime Minister Datuk Seri Anwar Ibrahim to implement clearer policy changes to improve the domestic economy, which in turn will benefit the stock market positively via more foreign inflows.”

He added the 1,400 point level for the FBM KLCI appeared to be quite a solid psychological support level.

With limited impact from the current credit and banking crisis in the United States on the financial industry here, coupled with attractive valuation, the risk and reward for the local bourse appears to be attractive..

“If the US economy experiences a hard landing condition, the Fed pivoting is likely to help calm the market.

“Hence, a dovish tone from the Fed moving forward, more supportive policies on the US banking system and lower than expected inflation numbers are positive catalysts to the market,” he added.

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FMB KLCI , Fed , Powell , rates , China , bankingsector , contagion


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