GLOBAL markets appeared to be jittery in the first week of 2023 on concerns over a recession in the US, a high cost of living and tighter monetary policy. Although the opening up of China after a three-year lockdown could offer some respite after a brutal 2022, that has yet to be tested.

In the past week, the FBM KLCI fell 0.27%, while Indonesia’s Jakarta Composite Index plunged 2.85% and Thailand’s SET was down 0.29%, in line with the weakness in the US markets, which saw the Dow Jones Industrial Average, S&P 500 and Nasdaq fall 0.66%, 0.74% and 1.2% respectively.

Last year, the global stock market was heavily battered amid fears of the US Federal Reserve’s monetary tightening to tame stubborn inflation. The move resulted in higher borrowing costs for businesses and consumers, while investors stayed away from riskier assets, including stocks.

While the Fed has signalled a more modest rate hike for the year in comparison to the massive increases in 2022, investor sentiment in the stock market has not seen much improvement.

Can the market go lower or has it already reached the bottom?

The market has already priced in the bad news, UOB Asset Management chief investment officer Francis Eng believes.

“The valuation of Malaysia, with a 2023 price-earnings ratio (PER) of between one and two standard deviation below mean, would suggest that a lot of bad news has been priced in,” he tells The Edge when asked about the market outlook for 2023.

At last Thursday’s close of 1,480.93 points, the FBM KLCI was trading at a PER of 15.5 times.

The average PER of the FBM KLCI over the past five years between 2018 and 2020 was at 18.32 times. Looking at the index’s annual performance over the last 10 years, it was down for seven out of the 10 years. In 2022, it was down 4.6%.

Eng reckons that while the global markets would be affected by tightening monetary policy and slowing global economic growth, Malaysia is expected to do better than its peers.

“The IMF (International Monetary Fund) expects one-third of the global economy to experience a recession in 2023. While a slowdown would affect global markets, Malaysia could do relatively better as it is a defensive market.

“We see a pause in tighter monetary policy by the Fed by mid-2023 and this is expected to be supportive of markets in the second half of 2023,” he says.

The interest rate hike by the Fed was the main factor causing unusual weakness in the stock markets globally in 2022, despite economic growth.

A bloodbath would be an understatement for global equity markets as 2022 turned out to be a miserable year for many investors. Many stocks, especially technology counters, saw huge declines as the era of easy money came to an end.

To control the highest inflation in decades in the US, the Fed went on a tear, raising its interest rate from zero to more than 4% in 2022 alone.

New uncertainties have emerged from the aggressive monetary hike. They include a possible slowdown in the US economy and heightened recession fears.  A popular definition of a recession is two consecutive quarters of declining gross domestic product (GDP). This has also raised the question of how many more hikes there will be this year.

It was reported that the Fed is expected to raise its interest rate in February, albeit at a smaller quantum of 25 basis points to 4.5%-4.75%.

How will the recession impact the stock market?

The rapid increase in US interest rates had led to foreign investors leaving emerging markets to seek safe-haven assets such as US Treasuries. For instance, in Malaysia, foreign equity holdings are at a decade low of 20% while those of local funds have cash levels that are at a two-year high of 14% as at October 2022, according to JPMorgan Asia Pacific Equity Research.

In a Dec 8 report, the research house painted a bearish picture of the market, saying the FBM KLCI will not be insulated from global recession fears and the execution risks of Malaysia’s new government.

“We advise investors to be nimble in their 2023 strategy and do monthly reviews. A bright spot is that incremental selling pressure from foreign and local funds is low,” it adds.

JPMorgan says a high cash position might still be the best strategy for investors, followed by high dividend yield equities such as British American Tobacco (Malaysia) Bhd, Gamuda Bhd, Malayan Banking Bhd, RHB Bank Bhd and Genting Malaysia Bhd, which offer a 6% to 9% FY2023 estimated dividend yield.

It also likes IHH Healthcare Bhd for being recession-proof and Kossan Rubber Industries Bhd as a defensive stock due to its cash holding of about 80% of its market capitalisation.

“Risks to our cautious stance are Fed rate cuts that are sooner than expected, no recession and local funds deploying cash,” says JPMorgan.

Corporate earnings to provide boost

On the contrary, AHAM Asset Management Bhd deputy head of equity David Loh believes that the Malaysia market will perform well this year on the back of the country’s economic growth and a rebound in corporate earnings.

“In contrast to the expected slowdown in the US economy, Malaysia’s economic fundamentals remain strong, with our GDP growing at the fastest pace in Asean this year.

“Moreover, corporate earnings are forecast to rebound sharply, after being dampened by the one-off prosperity tax last year,” he tells The Edge.

Loh points out that the high cash level of domestic funds and lower foreign holdings in Malaysian stocks is a positive for the market. “All things considered, we believe downside is limited for the local market at this juncture.”

Overall, he sees opportunities in stocks that are in the financial, consumer and tourism-related sectors, with investment potential in oil and gas (O&G) and technology stocks in the second half of the year.

MIDF Research head of research Imran Yassin Md Yusof expects corporate earnings to remain buoyant in 2023 following stellar results in 2022.

“In the broader market, based on our coverage universe of stocks listed on Bursa Malaysia as at early December 2022, the aggregate earnings growth is forecast at 12.2% year on year in 2023. All sectors, except plantation, are expected to show positive earnings growth,” he says.

“This is despite the potential emergence or intensification of several external headwinds, namely heightened risk of US economic recession engendered by rapid monetary tightening, risk of escalation in the ongoing Russia-Ukraine war, and risk of prolonged China macro underperformance,” Imran adds.

Although past performance is no guarantee of future performance, as the saying goes, market observers reckon that bear markets don’t last forever.

Former investment banker and high net worth investor Ian Yoong Kah Yin sees opportunities in the current market despite poor sentiment.

“We anticipate improvement at the macroeconomic level if the current unity government is allowed to run the full term. This could be a very good reason to buy Malaysian stocks,” he says.

Timing the market is hard, but Yoong observes pockets of opportunities in the midst of uncertainty.

“The Malaysian market has yet to see signs of life with domestic institutional investors sitting on their hands, retail investors licking their wounds when former darlings of the lockdown collapsed (many of these stocks are down 70%-95%) and low interest by foreign investors.

“The wonderful news for stock pickers is that almost everyone is negative about investing in Malaysia. Many well-managed listed companies that have earnings growth of 10%-15% per annum are trading at single-digit PERs,” he says.

Meanwhile, UOB Asset Management’s Eng expects corporate earnings to grow in the “low teens” for 2023, partly due to the oneoff impact from the prosperity tax in 2022.

Can the market gain from China’s reopening?

While many stock markets around the world started the year in a sombre mood, it is a different case in China. China’s stock markets kicked off the year with a bang, with the Shanghai Composite Index rising 2.1% and Shenzhen Component Index surging 3.1%. Hong Kong’s Hang Seng is also looking rosy, gaining more than 6%, while Singapore’s Straits Times Index has gained 1.32%.

China is set to reopen its borders to international travellers from Jan 8. However, the recent spike in the number of new Covid-19 infections in the country has added uncertainty to the plan.

Eng is positive that China’s opening will benefit and lift sentiment for Asian markets, including Malaysia.

“Key sectors that would benefit directly include those that are tourism-related. The direct impact on Malaysia may not be significant as there are limited listed tourism-related companies,” he adds.