This article first appeared in The Edge Malaysia Weekly on January 8, 2024 - January 14, 2024

IT will be a mix of external forces and internal progress that will determine whether the FBM KLCI fares better this year compared with last year’s close of 1,454.66 points, and whether the benchmark index  may even exceed the 1,600-point mark forecast by most research houses and fund managers.

Despite ending 2023 on a high on broad hopes that the US Federal Reserve will cut interest rates this year, global equity markets recorded a slow start to the new year, with the S&P 500 falling 0.6% and Nasdaq Composite shedding 1.6%. The blue-chip Dow Jones Industrial Average closed slightly higher at 37,715.04 points.

At the start of the trading year last Tuesday, the FBM KLCI climbed to 1,474.57 points from 1,453.1, while Singapore’s Straits Times Index fell 0.3% to 3,229.95  points. Japan’s Nikkei 225 fell 1.2% to 33,048.58, Hong Kong’s Hang Seng shed 0.6% to 16,542.19 and the Shanghai Composite index dipped 1% to 2,938.35. Australia’s S&P/ASX 200 declined 0.4% to 7,493.00, while South Korea’s Kospi slipped 0.8% to 2,585.77.

On the domestic front, heads of research have been bullish on the equity outlook for 2024 as many believe that much of the “bad news” has already been priced in. In this report, we delve into the findings of research houses for insights into factors that are expected to impact the markets this year.

The year 2024 is largely seen as a year of “soft landing” for the US economy amid the International Monetary Fund’s (IMF) prediction of moderate growth as the economy slows to 1.5% from 2.1% in 2023.

In a Dec 7 strategy report, MIDF Research forecast that the US economy will experience a mild slowdown, possibly from the middle of this year, as more Americans struggle to cope with the high borrowing costs. “In addition, we anticipate the US Federal Reserve will ease its policy setting during the year to avert a sharp recession risk,” says the research house.

“As demand and overall economic growth slow down, we expect the Fed to reduce its funds rate to stimulate the economy. This will be a shift in the Fed’s policy narrative to a less restrictive and accommodative monetary policy, with the assumption that US inflation will ease further and disinflate closer to the Fed’s 2% target.”

Although the Federal Open Market Committee members predicted possibly up to two rate cuts this year, according to the FOMC’s projection last September, the demand slowdown could push the Fed to do more in reducing the level of policy restrictiveness on the economy. “We expect the rate cuts could be more than a 50bps reduction as we foresee core Personal Consumption Expenditures inflation to fall below +3% by end-2024, given the latest reading at +3.5% y-o-y in October 2023,” it adds.

Meanwhile, RHB Research expects global growth to accelerate this year and maintains its above-consensus forecast for the US and China economies to expand by 2.2% and 5% respectively. The catalysts for its views are threefold — interest rate normalisation may materialise in the second half of the year, inflation risks to the central banks’ objectives will dissipate during the same period and China’s economy will recover this year.

“We expect investors to refocus on fundamentals while easing inflation data, a peaking monetary tightening cycle, the potential for easier liquidity conditions, softer DXY (US Dollar Index) trends and the pace of recovery in China’s macroeconomic conditions will be the key positive influences. The fundamental upside for equity markets will also be determined by the ability of corporates to meet earnings growth expectations, considering Corporate Malaysia’s recent poor track record in this regard,” says the research house.

It is noteworthy that IMF managing director Kristalina Georgieva, European Central Bank president Christine Lagarde and Bank of England governor Andrew Bailey have cautioned central banks around the world against rushing to relax their fight against inflation despite the Fed signalling its own policy pivot next year. “Sometimes, countries prematurely declare victory and then inflation gets more entrenched and the fight becomes harder,” Georgieva reportedly said.

The IMF projects the Malaysian economy to pick up slightly to 4.3% this year from 4% in 2023, supported by resilient private consumption and investment and a rebound in public spending. It also projects inflation to moderate further to 2.7% in 2024 (headline inflation was projected at 2.9% in 2023), although it says uncertainties surrounding the inflation outlook remain, including Putrajaya’s subsidy reform.

China’s economy is expected to continue recovering, with the IMF projecting a gross domestic product (GDP) growth of 4.6% this year compared with an estimated 5.4% in 2023. Analysts point to early signs of health such as the better-than-expected 3Q2023 GDP growth data, relatively stronger China-centric high-frequency data in 2H2023 and continued stimulus measures by the Chinese authorities.

“The strength in domestic consumption has been the determinant in China’s recovery thus far, which explains the moderate growth of 4.9% y-o-y in 3QCY2023 compared with 6.3% y-o-y in 2QCY2023. This caused the government to introduce measures to revitalise spending and ensure continued recovery,” says MIDF Research, which believes the nation’s business activities will also benefit from the recovery in global manufacturing.

With the ongoing problem with China’s overvalued and debt-laden property market remaining to be the main challenge threatening to derail economic recovery, the research house foresees more policy support from the Chinese government should those issues slow the economy.

“The decision by the People’s Bank of China (PBOC) not to cut the loan prime rates for both the one-year and five-year tenures last November signalled confidence that the momentum of growth in the economy has stabilised and the recovery is expected to continue,” says MIDF Research.

RHB Research said in a note last Friday that the anticipated pickup in China’s economy will have positive implications for Corporate Malaysia, either directly or indirectly. “While outbound tourists have yet to return in a meaningful way, we see beneficiaries in the transport, tourism, hospitality, gaming, consumer, healthcare, auto and basic materials sectors.”

The research house added that trade and tourism prospects, namely in Malaysia, Vietnam, Singapore, Thailand and Indonesia, will benefit from the return of China and the electrical and electronics (E&E) trade. “We think trade prospects, especially in Malaysia, Vietnam, Singapore and Thailand, will benefit from the return of China and the E&E trade.”

Although the US dollar-ringgit (USD/MYR) exchange rate remains elevated, foreign exchange experts have forecast that the ringgit will strengthen against the greenback this year following widely anticipated interest rate cuts by the Fed in the second quarter. The ringgit is expected to remain elevated in the first quarter of this year due to the high interest rates in the US and slower economic recovery in China.

For comparison, the ringgit was trading mostly higher against a basket of major currencies. Last Friday, the local currency improved against the pound sterling to 5.8907/8983 from 5.8964/9015 the day before, and appreciated against the yen to 3.2054/2097 from 3.2185/2215.

However, the ringgit was trading mostly lower against Asean currencies, falling to 3.4921/4968 against the Singapore dollar last Friday from 3.4903/4936 the day before, and depreciating to 8.36/8.37 against the Philippine peso from 8.33/8.34. The local currency was lower against the rupiah at 299.6/300.1 from 299.0/299.4, but it was higher against the baht at 13.4236/4487 from 13.4500/4687.

MIDF Research expects USD/MYR to average at 4.38 and reach 4.20 by the end of the year, while Maybank Investment Bank in a note last Tuesday pegged it at 4.40, supported by the execution of plans under the macro blueprints launched and fiscal discipline-cum-consolidation. Maybank IB noted that the ringgit’s weakness and higher volatility against the greenback in 2023 had provided investors with trading opportunities, especially in glove stocks. RHB Research expects USD/MYR to hover in the 4.30 to 4.60 range by the second half of the year.

RHB Research believes importers will benefit from the lower landed cost of imports, as well as companies with US dollar-denominated debt, while those disadvantaged by a stronger ringgit will include exporters and companies with significant overseas earnings. Among the bank-backed research house’s predictions of top beneficiaries are Nestlé (M) Bhd, Axiata Group Bhd, MR DIY Group Bhd, Heineken Malaysia Bhd and Padini Holdings Bhd, while losers include Press Metal Aluminium Holdings Bhd, MISC Bhd, Gamuda Bhd, Guan Chong Bhd and Power Root Bhd.

While hope of a more stable domestic political environment and progress in fiscal reforms will support the ringgit as well improve investor sentiment, analysts have articulated that implementing fiscal reforms to raise revenue for Putrajaya and rationalise costs will have critical implications for the state of public finances.

AmInvestment Bank head of research Alex Goh tells The Edge that Malaysia’s targeted subsidy rationalisation will raise the cost of living and impact consumer confidence, while further delays in infrastructural rollouts — if the government is unable to execute effectively — could derail the nation’s economic recovery.

Having said that, he believes there will be more foreign direct investments (FDIs) from the government initiatives that will be implemented under the New Industrial Master Plan 2030, against the backdrop of trade diversion from China amid ongoing tensions with the US. “However, the quantum of improvement is difficult to gauge given that the rest of Southeast Asia is aggressively courting foreign investors,” he says.

Meanwhile, MIDF Research’s Imran Yassin Md Yusof believes that in terms of portfolio investments, there may be a reallocation of foreign funds into laggard markets such as the Asean-5 (except the Jakarta Composite Index) this year. “Hence, there are prospects that we could see a return of foreign funds this year with [progress in terms of] policy stability,” he says.

For context, MIDF Research’s strategy report notes that the strong performance of advanced markets, coupled with domestic factors of emerging markets, had led to foreign investors’ cautious stance, especially in the Asean-5 markets that the research house tracked (Malaysia, Indonesia, Thailand, the Philippines and Vietnam).

As at Dec 1, 2023, the cumulative foreign flows for the Asean-5 was US$8.36 billion in net outflows compared with US$22.4 billion in net inflows into the Asean-5 and three more advanced Asian markets (South Korea, Taiwan and India). By comparison, there was a net inflow of US$11.17 billion into the Asean-5 markets in 2022 compared with US$70.17 billion in net outflows from the more advanced Asian markets, says MIDF Research.

The research house also observes that the situation in some of the Asean-5 markets, namely Malaysia and the Philippines, appeared to be reversing. “The month of November, which coincides with markets expecting the Fed to pause its rate hikes, saw net inflows of US$332.3 million (RM1.55 billion) and US$18.6 million respectively.

“Meanwhile, Indonesia saw a significant reduction in the pace of its net outflows from -US$496.3 million in October to -US$30.2 million in November. Only Thailand and Vietnam continued to see net outflows. We believe this is an encouraging sign and may portend the return of foreign funds into the Asean-5 markets in 2024, especially as interest rates are [possibly] no longer a factor,” says MIDF Research.

Key investment themes

The construction, utility, property and transport sectors feature prominently on the radar screens of research houses. MIDF Research’s Imran expects external trade to see a recovery next year, and opines that trade-related stocks such as logistics and ports will benefit from this.

The main drivers will be the potential for improved consumption patterns following the cessation of further monetary policy tightening by major economies. Subsequently, we can expect an increase in inter-regional container movements. Furthermore, freight rates are expected to stabilise after hitting a bottom in mid-CY2023, coupled with an anticipated recovery in shipment volume due to the current affordability of freight rates, says the research house.

Imran expects further updates on the National Energy Transition Roadmap (NETR) as the research house believes its launch could lead to a new economic catalyst. He believes the clear and firm policy layout on the energy transition under NETR should drive a sector rerating on improved growth and environmental, social and corporate governance (ESG) profile.

He echoes the widely held view that the construction sector will continue to benefit from high development expenditure (DevEx). “The 12th Malaysia Plan Mid-Term Review that was announced last year has given more prominence to the construction sector. This is based on the planned DevEx and the expectation that the government will spend about RM90 billion per year for the remainder of the 12MP period,” he says.

“This could entail more infrastructure works and we can expect the upcoming rollout of large rail projects such as the Mass Rapid Transit Line 3, Penang light rail transit and proposed revival of the Kuala Lumpur-Singapore high-speed rail (HSR) to provide a boost to order books of construction companies.”

Meanwhile, any effects from geopolitical conflicts and a US recession pose a downside risk to the performance of markets this year. Note that the Russia-Ukraine conflict appears to be nearing a conclusion while the majority of analysts expect the tensions in the Middle East (Israel-Palestine conflict) to not escalate any further this year.

As for the possibility of a US recession, analysts expect the US economy to experience a “soft landing” and avert a recession.

“A US recession this year is one of the downside risks that has a significant probability, based on the ‘amber’ light signals coming from the US Treasury yield curve (which inverted in 4Q2022) and the US Leading Economic Index. However, we cannot ascertain the cause or timing of the recession. Hence, our base case is for the US economy to register slower growth, or a so-called ‘soft landing’,” says Imran.

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