INVE$T | Market Sentiments
According to HSBC Group Asian economics research co-head Frederic Neumann, Bank Negara (BNM) is likely to raise interest rates this year following in the footsteps of the United States Federal Reserve, which plans to raise rates by three to four times in 2022 to fight inflation. BNM could raise its overnight policy rate (OPR) by 50 basis points (bps) this year on the back of stronger domestic demand and strong export numbers, as the world economy recovers from the impact of the Covid-19 pandemic. Within the Asia region, Malaysia is likely expected to experience one of the strongest domestic demand recoveries. On the investment side, particularly foreign investment, Malaysia will be the key beneficiary under the current trends, and the country’s exports are likely to remain supported. There is a desire by BNM to start to normalise its interest rates again, relatively swiftly. This is where the 50bps hike comes through. He was speaking at the HSBC Asian outlook 2022 media briefing. BNM has kept its OPR at 1.75% since July 2020, when it cut the rate from 2% to support economic growth that was affected by the Covid-19 pandemic and movement control order to curb the infection rate. The OPR at 1.75% is the lowest on record since 2004. As Malaysia’s labour market strengthens, the country’s core inflation may gradually trend higher to 2% by end-2022, thus, allowing Bank Negara to initiate a gradual monetary tightening process in the second half of 2022. HSBC expects a total of 100bps of rate hikes over 2022 and 2023. The Malaysian economy has one of the brighter outlooks in the region. The Malaysian economy is expected to grow 3.6% in 2021 and accelerate to 5.6% this year. Malaysia had one of the highest vaccination rates in Asia, allowing a high degree of resilience. While restrictions may be re-imposed, the government will likely opt for highly targeted measures as opposed to lockdowns. Malaysia is currently attracting the highest share of foreign direct investment (FDI) commitments in Asean, overtaking Vietnam which bodes well for the future of manufacturing. Malaysia’s manufacturing outlook remains impressively strong. Despite the positive outlook on the economy, the interest rate hike could pose the risk of downward pressure on the local stock market. According to HSBC chief Asia equity strategist Herald van der Linde, funds are anticipated to reduce their exposure to Malaysian equities due to potential rising interest rates. In contrast to a few of the other Asean markets, the situation in Malaysia is that domestic interest rates are rising which is not positive for the market. Most funds are already pretty overweight on Malaysia. So, they can’t really buy that much more if they wanted to. Some of the funds would probably reduce their exposure to Malaysian equities and move to other Asean markets such as the Philippines and Indonesia. Growth in all markets is coming down because last year was a large bounce in earnings growth. While there were still a lot of uncertainties, HSBC also believes that the ringgit is undervalued and the local currency could see recovery this year as the Malaysian economy emerges from a “double-dip” recession. The Ringgit is expected to be supported by the higher FDI inflows and the interest rate hike by the central bank should help the Ringgit to maintain a “yield advantage against the US dollar” and keep real rates positive. Greater confidence in the domestic economy and in local assets would help curb residents’ foreign asset accumulation. However, HSBC warned that its positive views on the ringgit were dependent on the Covid-19 developments and that political uncertainty may weigh on sentiment and affect capital flows.
Bursa unveils enhanced requirements
Bursa Malaysia has announced enhanced requirements for Main and ACE Market listings to further strengthen board independence, quality and diversity. The enhanced listing requirements now limits the tenure of an independent director to not more than a cumulative 12 years in a listed issuer and its group of corporations. All long serving independent directors impacted by this enhancement must resign or be redesignated as non-independent directors by June 1, 2023. Another key enhancement is the requirement for listed issuers (PLCs) with a market cap of RM2bil as at Dec 31, 2021 to appoint at least one woman director on their boards by Sept 1, 2022, as announced by the finance minister in Budget 2022. For the remaining PLCs, the requirement must be complied with by June 1, 2023. Additionally, Bursa also introduced a new rule which requires PLCs to have in place a fit and proper policy that addresses board quality and integrity for the appointment and re-election of directors across the PLC group, which must be published on the PLCs’ websites, starting from July 1, 2022. PLCs are also required to disclose the application of the PLCs’ fit and proper policy in the nomination and election of their directors in their annual reports. This seeks to improve the overall quality of directors and promote greater transparency on the criteria for board appointments.
Confidence in small-cap stocks remains – RHB Research
RHB Research notes in their report that despite the unfavourable short-term outlook, there are still pockets of opportunity for investors who are interested in small-cap stocks. Optimism in the market remains with the high vaccination rate and as the economy continues on its recovery path, which would enable investors to benefit from a sector rotational play and a meticulous stock-picking strategy. The research house advocated several key investment themes including exporters, value stocks and election play. Against this backdrop, it recommended consumer discretionary, technology, logistics, oil and gas (O&G), commodity play, and politically-linked thematic play as sectors to look out for in the small-to-mid caps space. The accommodative fiscal and monetary policies should continue to lend support to private consumption, supporting the consumer discretionary sector. Meanwhile, the O&G sector is likely to draw interest, premised on the high crude oil price trend, higher capex allocation and oil demand recovery. The technology space will also remain in favour thanks to its structural growth and strong fundamentals. However, it is paramount that investors remain selective on technology companies with a strong track record and competitive edge to sustain the elevated valuations and weather through a potential valuation de-rating, on the back of persistent high inflation rates and the rising interest rate environment. As for the logistics sector, growth will continue on improving trade and volume following the reopening and resumption of economic activities. Additionally, secular e-commerce play, elevated freight rates, growing demand for third-party logistics, and favourable measures and tax incentives from policy makers bode well for the industry. The imminent general election could also see politically-linked stocks gain prominence, with improved sentiment and the resumption of contract flows. With the FBM 70 Index and FBM Small Cap Index’s current forward price-earnings ratios (P/E) having retraced to below their five-year mean levels, and the indices are now trading at two times to three times P/E discounts to that of the FBM KLCI – based on RHB’s coverage universe – the brokerage cautioned that it is still paramount for investors to exercise extra diligence in their stock-picking, despite a better risk-reward ratio in terms of the relative forward valuation. It also highlighted that valuation for the MSCI Malaysia Small Cap Index continued to be at the north of the MSCI benchmark index. This is mostly owing to the superb performance of many stocks in the small-cap space, especially the high-flying technology stocks that command premium valuations, even in the region. The prolonged pandemic, political instability, earnings disappointment, worsening economic conditions, liquidity issues and higher environmental, social and governance-related risks could curb potential gains in the small-cap space.
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Eye On The Markets
This week, on Friday (21Jan), the Ringgit opened at 4.1925 against the USD from 4.1865 on Monday (17Jan). Meanwhile, the Ringgit was 3.1110 to the Sing Dollar on Friday (21Jan). On Monday (17Jan), the FBM KLCI opened at 1553.80. As at Friday (21Jan) 10:00am, the FBM KLCI is down 28.17 points for the week at 1525.63. Over in US, the overnight Dow Jones Industrial Average closed down 313.26 points (-0.89%) to 34,715.39 whilst the NASDAQ shed 186.20 points (-1.30%) to 14,154.00