This article first appeared in Capital, The Edge Malaysia Weekly on December 4, 2023 - December 10, 2023

DECEMBER is typically a month of gains for equities buoyed by window-dressing activities by portfolio managers. In the past five years, the FBM KLCI rose between 0.4% and 4.1% during the month, while the FBM Emas Index and FBM Top 100 Index also saw increases from 2019 to 2022, but not in 2018.

Having declined 2.9% year to date, the FBM KLCI closed at 1,452.74 points last Thursday compared with last year’s 1,495 points.

Will the benchmark index end the year in positive territory? Most research houses are projecting that it will, and at above 1,500 points. CGS-CIMB Research has the highest year-end target of 1,550 points.

Even so, market experts The Edge spoke to generally do not see much upside for the FBM KLCI in December.

Inter-Pacific Securities head of research Victor Wan, for one, expects a mild upside in the year-end window-dressing activities, owing to market uncertainty and a possible slowdown in the global economy. Apart from that, high interest rates, at least in the first half of next year, may continue to weigh on equities.

“Our exports are still not doing too well. So far, it has been supported by domestic activities. But again, things are very fluid at this point,” he tells The Edge.

“For next year, I think it depends on how far the pullback will be. I think things may improve towards the middle of the year. Based on the EPS (earnings per share) and economic growth forecasts, we’re possibly looking at above 1,550 points for the FBM KLCI,” he adds.

The market revival will also be supported by potential rate cuts in developed economies in the second half of next year, according to Wan.

“Global prospects are certainly there as inflation rates are coming off quite substantially … Right now, there’s quite a bit of cautiousness, but things are starting to bottom out, though it remains to be seen if it will remain at the bottom or show an upcycle. I suspect that 1Q2024 may still be slow,” he opines.

That said, he believes that the 4%-5% gross domestic product (GDP) growth projected for Malaysia for 2024 is achievable, judging from the improvement seen in the latest corporate earnings.

“This year has been fairly subdued, but things should improve if you look at the corporate results. Some are fairly encouraging. So, I think that will continue in the final quarter of the year. Maybe there will be some slowdown at the start of next year, but it possibly will pick up again after that,” he ventures.

Even if there is a recession in the US in 2024, he believes it will be very mild. “The most important thing is employment. As long as people are employed, they’re able to spend whether on discretionary or non-discretionary items.”

Given the inversion of the yield spread between the 10-year and two-year US Treasury rates, fund managers have cautioned that the US may still fall into a recession in the next six months.

At home, Malaysia’s GDP expanded 3.9% in the first nine months of 2023, compared with 9.2% in the same period of 2022. Bank Negara Malaysia is confident that the economy will be able to meet the 4% growth target given the positive growth in private consumption and demand for passenger cars.

Sector-wise, Wan favours the electrical and electronics (E&E) segment, especially peripheral equipment manufacturers, on the back of a pickup in demand orders.

He says it is likely to be a tale of two halves for the manufacturing sector, with a slowdown in the first half before a rebound in the second half of the year, which could eventually lead to a stronger export performance.

William Ng, chief investment officer at LeInves PLT, also does not expect significant upside from this year’s window-dressing effect, given the current high interest rate environment and weak ringgit. “There are no major boosts for an upward window dressing. Investors still need time to digest government policies. And it takes time to kick-start some of the [proposed] projects,” he opines.

But he believes the market outlook will be more exciting in 2024 when the political situation stabilises. It has been a year since the formation of a unity government led by Pakatan Harapan as well as the swearing-in of Datuk Seri Anwar Ibrahim as Malaysia’s 10th prime minister.

“There could be a good chance that construction stocks will rally if the government speeds up the rolling out of mega projects such as the MRT3 and high-speed rail,” adds Ng.

Areca Capital Sdn Bhd CEO Danny Wong expects infrastructure and public spending to be the key catalysts driving private consumption and market confidence, thus attracting foreign funds into the local market. “With the ringgit now starting to recover, the local market will see renewed interest from investors.”

Year to date, foreign funds have been net sellers of Malaysian equities to the tune of RM2.73 billion, according to MIDF Research’s Nov 27 fund flow report. Net selling by local retail investors amounted to RM1.06 billion, while local institutions have net bought RM3.79 billion worth of equities.

Since touching a 25-year low of nearly 4.80 against the greenback, the ringgit has regained some strength and was trading at 4.6615 as at 5pm last Thursday.

Over in the US, Wong says more traders will gravitate back to the equity markets as the US Federal Reserve is believed to be done with rate hikes. “Before entering the Christmas season, some of the portfolios — especially international portfolios — will reallocate funds in local equities,” he says.

Given the continued growth of the local economy, he remains positive on the banking sector despite margin squeeze concerns. “No doubt, there could be a potential net interest margin squeeze, but because we haven’t increased our interest rates as much as the US, the margin compression may not be that much.

“Also, it will be mitigated by loan growth and economic expansion,” Wong says, noting that banks that have a foreign presence are set to reap greater benefits from the recovery in regional economies.

Wong also prefers the construction and E&E sectors, the former seen benefitting from infrastructure developments in the country, and the latter, poised to enjoy tailwinds next year as a result of a higher number of orders, and the electric vehicle and Internet of Things themes. 

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