Market continue to consolidate in the absence of catalysts - Manokaran

Weekly market analysis by Manokaran Mottain

MARKET

The performance of the local stock market was well within expectations as it remained in consolidation mode over the past week. We witnessed some buying activities following last week’s sell off with the benchmark KLCI Index ending the week marginally higher at 1,601.97 points (+12.96 points or 0.81%).  

Going forward, I am expecting the market to continue consolidating in the absence of any market moving catalysts and short term direction will be determined by specific industry or company news flow.  The 1,600-point level will continue to be the psychological level that the market will cling to for the time being as we head into a rising interest rate environment in the coming months.      

However, the Malaysian bond market experienced a broad sell off in March 2022 and posted a large foreign net outflow in March 2022 totaling RM4.0 billion as compared to a net inflow of RM3.1 billion in February 2022 according to RAM Rating Services Bhd. 

The outflow was led by Malaysian Government Securities (MGS) and Government Investment Issue (GII) of RM4.1 billion. Bond yields jumped sharply during the month with the 10-year US Treasuries (UST) and 10-year MGS yields spiking by 49 and 19.6 basis points (bps) to 2.32% and 3.84% respectively at the end of March 2022. 

The selling pressure continued into April with the yields for the UST and MGS rising to 2.90% and 4.18% as at 22 April 2022 narrowing the yield spreads to just 128bps from 159bps & 171bps in March 2022 & February 2022 respectively.  

ECONOMY

Malaysia’s Consumer Price Index (CPI) rose by 2.2% on a year-on-year basis (y-o-y) in March 2022 to 125.6 from 122.9 in March 2021. On a month-on-month basis, the March 2022 CPI rose 0.3% as compared to February 2022. 

The rise in headline inflation was primarily driven by a 4.0% y-o-y increase in the food and non-alcoholic beverages segment. The meat sub-group within the food segment rose by 7.6% y-o-y led by a 10.5% y-o-y and 4.3% y-o-y hike in chicken and beef prices respectively. 

Meanwhile price increases in other segments such as furnishings, household equipment and routine household maintenance (3.0%), restaurants and hotels (2.9%) and transport (2.6%) also contributed to the overall increase in the CPI. 

Core inflation rose 2.0% y-o-y in March 2022 with the transport segment posting the highest increase at 3.9% followed by the food and non-alcoholic beverages (3.5%), furnishings, household equipment and routine household maintenance (3.0%), restaurants and hotels (2.9%), miscellaneous goods and services (1.9%) and recreation services and culture (1.1%) segments.   

The Ministry of Plantation Industries and Commodities is committed to encourage investors and companies from Egypt and Qatar to form partnerships with Malaysian companies in the rubber sector such as tyre manufacturing. 

The government has gazette a 600-hectare dedicated rubber eco-industrial park known as the Kedah Rubber City to cater for rubber research & development and manufacturing of rubber products. Special incentives would also be provided to investors who are based in KRC such as pioneer status and R&D grants. 

The Malaysian Communications and Multimedia Commission (MCMC) disclosed that Malaysia’s 4G coverage has reached 95.52% as at 31 March 2022 under Phase 1 of the Jalinan Digital Negara initiative. 

MCM Chairman Datuk Fadhlullah Suhaimi Abdul Malek said the average mobile broadband speed is 40.13 Megabits per second (Mbps), surpassing its initial target of 35 Mbps. He added that Digital Nasional Berhad has completed 500 5G sites as at the end of 2021 and the target for 5G sites this year is roughly around 3,500 sites.    
 

CURRENCY

The performance of the Ringgit caught virtually everyone by surprise as it declined sharply against all the major currencies over the past week.

I believe that foreign investors started their portfolio rebalancing exercises aggressively which triggered intense selling activities in the local bond market over the week as they start to factor in the anticipation of a sharp narrowing of the interest rate differential between the US Federal Funds Rate (FFR) and the Overnight Policy Rate (OPR) ahead of the upcoming Federal Open Market Committee meeting on 3-4 May 2022. 

Current expectations are that the US Federal Reserve raising interest rates by 50 basis points and likely to maintain an aggressive monetary policy stance going forward in an effort to keep a lid on inflationary pressures. Meanwhile, the market expects Bank Negara to only raise interest rates once (25bps) for 2022 with the hike likely to occur in the second half of the year.  

As described above, the bond market has already reflected the narrowing yield spreads between the US Treasuries and the local MGS and the consequent net outflow of funds to other markets in the region was likely the main cause of the Ringgit weakness over the week.    

The local currency weakened by a massive 9 sen (2.1%) over the week against the US Dollar to RM4.3230 / USD1.00 which is a 23-month high. With last week’s sharp volatility, I am expecting the Ringgit trade between RM4.28 to RM4.36 in the coming week.     
  

The Ringgit weakened against the British Pound and Japanese Yen to RM5.5692 / GBP1.00 and RM3.3650 / JPY100. The Ringgit dropped to a 4-year low against the Singapore Dollar at RM3.1601/ SGD1.00 and surprisingly dropped 10sen against the Euro over the past 5 days to RM4.6775 / EUR1.00.    

POLITICS

DAP Secretary General Anthony Loke said Pakatan Harapan (PH) could not cooperate with Perikatan Nasional (PN) for the upcoming 15th General Election (GE15) as PN is part of the current government. He added that the “big tent” concept that was agreed in the Port Dickson Resolution by the PH leadership only covered co-operation among parties in the opposition bloc. 

Meanwhile, PAS President Tan Sri Abdul Hadi Awang had also ruled out any future political co-operation between PAS and PH and will continue working with PN for GE15. - DagangNews.com