Malaysia’s Equity Market Review  

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By Kenanga Investors

US equities ended the month flattish after rallying from a new 52-week low during the month as the prolonged Chinese lockdown, the ongoing war between Russia and Ukraine and inflation concerns continued to weigh down on investor sentiment. With volatility from April bleeding into the first three weeks of the month, both the S&P 500 and the Dow Jones bottomed out on 20 May before recovering strongly to end the month’s flattish. However, the tech-heavy  Nasdaq composite was down 2.1 per cent. On the back of persistently high inflation and strong labour market recovery, the Federal Reserve (Fed) announced its second-rate hike for the year with an aggressive 50 bps increase, the most in 22 years. US headline inflation jumped to 8.3 per cent YoY in April which further fuelled speculations that the economy is overheating. The  Fed also announced it will begin shrinking its US$8.9 trillion balance sheet in June. The Fed  Chairman Powell acknowledged that getting inflation under control won’t be easy, but he believes there is still a path to a “softish” landing for the economy as opposed to a recession.  Given the Fed’s increasingly hawkish stance, the markets are now expecting another two 50  bps rate increases during both the June and July FOMC meetings. At month’s end, the yield on the 10-year US Treasury stood at 2.84 per cent. 

Chinese equities rallied after Beijing unveiled a raft of support measures to cushion an economic slowdown triggered by the country’s Covid-19 zero-tolerance approach. The markets also benefitted from the announcement of the end of two-month-long Covid-19  lockdowns in Shanghai. China’s State Council released a set of 33 measures titled Policy  Measure Package to Stabilize the Economy (“the policy package”), covering a wide range of mechanisms aimed at supporting businesses impacted by the pandemic. The policy package comes after Shanghai issued a set of 50 policy measures to boost economic activity in the wake of the recent lockdowns. It also coincides with the reopening of Shanghai and the gradual resumption of normal life in Beijing. China’s factory activity shrank less sharply as virus restrictions eased and some production resumed. The Caixin/Markit Manufacturing  Purchasing Managers’ Index (PMI) rose to a stronger-than-expected 48.1 in May from 46.0 in  April, where it hit its lowest level in 26 months. The latest Caixin/Markit reading reflected a  similar improvement in the official manufacturing PMI in May, which also beat forecasts and signalled that the worst of the country’s lockdown-related disruptions was over. 

Locally, May was a volatile month for the KLCI which fell by 1.9 per cent to close at 1,570 points.  The benchmark index fell from 1,600 points to a low of 1,531 points on 24th May before rebounding on the last day of trading to 1,570 points due to the MSCI rebalancing. The volatility followed global markets as market sentiment continued to be weighed down by concerns over inflation and worries that rate hikes by the central bank could tip the economy into a recession. Key news flows for the month were a stronger-than-expected 1Q22 GDP  growth of five per cent, and government efforts to tame inflation and resolve forced labour allegations. The markets were also surprised by the OPR rate hike of 25 bps to 2.00 per cent, as well as the delay in plans to bring in foreign workers. 

Foreign investors’ net buying fell to RM77 million (versus RM826 million in April 2022) bringing the cumulative foreign net inflows for 5M22 to RM7.4 billion as compared to 5M21 net sell of  RM3 billion. The top three best-performing sectors in May were energy (+7.9 per cent), REIT (+1.7 per cent) and finance (-0.1 per cent). The top three worst-performing sectors were plantation (-9.7 per cent),  healthcare (-6.2 per cent) and property (-5.7 per cent). Onto commodities, oil continued its outperformance with the Brent rising 12.3 per cent closing the month at US$122.8/bbl on the back of supply disruptions stemming from Russia’s ongoing invasion of Ukraine and the ban on Russian oil and natural gas. CPO prices however closed lower at RM6,304/mt, declining 11.3 per cent. 

Equity Market Outlook 

With the US entering late-cycle dynamics and decelerating growth, rising inflation and policy tightening would weigh on economic expansion. The key focus remains on the path of central bank monetary policy, easing of geopolitical tensions, China lockdown, as well as corporate earnings. 

China’s gradual re-opening and shift to more policy stimulus could lend support to its economic recovery. Increased infrastructure investment and looser monetary policy could help demand to recover and markets bottom out provided that further lockdowns remain limited. Meanwhile, ASEAN continues to benefit from the reopening, with pent-up consumer spending supporting a cyclical upturn. Additionally, higher commodity prices will benefit certain countries within ASEAN. 

Equity Fund Strategy 

Overall, for Malaysia we adopt a defensive strategy, focusing on companies where fundamentals remain solid. We prefer sectors such as consumer discretionary, financials,  industrials and commodities. For structural growth themes such as tech, we are buyers of market weakness for its longer-term potential. 

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