KUALA LUMPUR (Jan 16): The Malaysian equities market is expected to extend its recovery in 2023, but the momentum is not likely to be on par with its regional peers based on past track record, says HSBC Asia Pacific head of equity strategy Herald van der Linde.

“Malaysia is, in equities, a very stable market. When the market comes down, [Malaysia] is where you want to be, because it wouldn’t fall as much as the other markets.

“But if the market is in a recovery, which we expect it will be in 2023, Malaysia [won't] catch up as much either. It is much more stable as compared to some of the other markets across the region, such as Thailand and China,” he said at the HSBC Asian Outlook 2023 virtual media briefing on Monday (Jan 16).

Van der Linde is forecasting the KLCI to end 2023 at 1,570, while having an “underweight” rating for Malaysian equities. He expects the Indonesian and Indian markets to have the “most interesting growth story” across the region, driven by improving domestic consumer and financial sectors.

Nonetheless, he noted that India is by far the most expensive market across the region and could continue to face foreign fund outflows in the near term.

“A lot of funds were significantly overweight in India. Into 2022, they have reduced that already; we have seen outflows from India, that might continue……I suspect a lot of that was in order to fund purchases in China.

“But we continue to be quite positive on the Indian equities market. I can understand that maybe in the near term, these outflows may continue to fund these purchases but in the long run, with the outlook and earnings growth and also the sustainability in earnings growth that we see across the region, India is unmatched in that regard,” he said.

In terms of fixed income assets, HSBC Asia Pacific rates strategist Pin Ru Tan said Malaysia's government bonds are expected to have a more neutral performance this year in a peaked interest rates and US dollar environment.

“For several months in 2022, we were actually positive on Malaysia government bonds. As compared to a lot of emerging markets, Malaysia’s inflation pressure was generally better contained last year, and we looked a lot from a real yield perspective in deciding what government bonds we want to buy.

“With relatively contained inflation, Malaysia's real yield stood out back in 2022.

"This year, with the peaked rate and peaked dollar move, we are really looking for more spread compression opportunities to get more Alpha. In that regard, because of comparatively better performance for Malaysian bonds last year, we are expecting more neutral performance [in 2023],” she said.

Although Malaysian equities and bonds appear less attractive than its regional peers, the country remains one of the top choices for businesses to diversify their supply chain, which will help support the economy in times of downturn, said HSBC’s co-head for global research Asia and chief Asia economist Frederic Neumann.

“It is clear to us that even in a global trade slowdown, economies like Malaysia might have an outperformance on their trade. Their trade may contract, but not as much as their trading partners; this is kind of a sign that they are tapping into new production capacity because they are winning these supply chains,” he said.

“Malaysia is one of the key beneficiaries of supply chain rejigging that we see across Asia. Extraordinarily high amount of foreign direct investment continue to pour into the economy, and it is really a virtuous cycle here with more foreign direct investment, expanding the capacity, connecting Malaysia to international supply chain, particularly on the electronic side.

“Of course, Malaysia is also continuously benefiting from the high energy prices and commodities in general,” he told reporters at the briefing.

HSBC is expecting Malaysia's economic growth to decelerate to 4.0% this year, from an estimated 8.4% last year.

“However, 4.0% growth these days is still a very robust growth rate indeed, and that will actually mean that the central bank, BNM, will have to raise interest rates into the second quarter to 3.5%, to [contain] some of these lingering price pressures,” said Neumann.

Neumann is also optimistic that with China’s pivot from the Zero-Covid-19 policy, the country’s economy is expected to stabilise by the second quarter, paving ways for it to record a 5% growth in gross domestic product this year.

However, he does not expect the reopening of China to be capable of offsetting the weaker growth in the US and Europe, particularly the demand cycle for electronics.

“China’s reopening is a positive for exports in Asian economies. [China] itself is probably two-thirds the size of the European and US export markets put together. So, it doesn’t quite fully offset weaker growth in the US and Europe, but it goes a long way towards supporting growth.

“Having said that, China’s demand will not help to turn around the electronic cycle, in which many Asian economies depend, whether it is Philippines, Korea, Taiwan, Malaysia or Vietnam. There are still exposure to weaker global electronics demand; even with China’s reopening, you cannot fully offset that particular drag,” he said.

Neumann noted that there is also a rising number of Chinese companies investing in the Malaysian economy, particularly in the manufacturing sector, which is expected to support domestic economic growth.

“With the reopening of the Chinese economy, one would expect more bilateral travel benefitting [not only] the tourism industry, but also bilateral investment; so it is that particular cordial Malaysia-China (relationship) on trade and investment which will likely benefit the economy,” he said.