This article first appeared in Capital, The Edge Malaysia Weekly on February 19, 2024 - February 25, 2024
GLOBAL financial markets have kicked off 2024 on a steady footing, with the US Dow Jones Industrial Average and S&P 500 indices hitting another record high recently on the back of strong corporate earnings. Taiwan’s stock benchmark also surged to its all-time high last Thursday, thanks to optimism in the tech sector and robust demand for artificial intelligence tech. On the local front, the FBM KLCI has risen 5% this year, driven by banking and utility stocks. This has also made it the best performer in the region.
Notably, there has been a surge in trading activity. Total trading volume edged higher at 117.52 billion shares valued at RM70.35 billion for January 2024, against 80.23 billion shares valued at RM56.41 billion for December 2023, according to Bursa Malaysia data.
Having said that, with a potential slowdown in the global economy this year, what will be the impact on corporate earnings and financial markets?
To understand better the 2024 investment landscape, The Edge spoke to three fund managers to get their views on the global and local economic landscape and the factors affecting their outlook.
Peter Lim Tze Cheng
Founder and Chief Research Officer
Trident Analytics Sdn Bhd
On key investment themes for 2024
The Johor theme — if you’re trying to bet industrial, then of course the biggest land owner is UEM Sunrise Bhd, but if you are betting on the central business district or the RTS (Rapid Transit System), then it would be Ekovest Bhd and Iskandar Waterfront City Bhd. My view is that you can’t run from the RTS.
For tech, I like the Osat (outsourced semiconductor assembly and test) players like Unisem (M) Bhd, Malaysian Pacific Industries Bhd, Inari Amertron Bhd and Globetronics Technology Bhd. When demand recovers, foundry players will benefit first, such as TSMC (Taiwan Semiconductor Manufacturing Co Ltd) and Samsung Electronics. The second beneficiary would be Osat players, which provide packaging services.
The 2Q2023 period was the worst for the tech sector and that is over. We started to see order recovery in 3Q2023.
On whether Malaysia is attractive enough for foreign investors amid expectations of global fund flows to emerging markets, on the back of expected rate cuts in 2H2024 and a weakening US dollar
The peak of the foreign shareholding on Bursa Malaysia was in 2007 at 28%. Right now, it hovers around 19% to 20%. With the right policies, the government should be able to attract foreign funds. How does the government plan to close the deficit gap? Creative new taxes such as the capital gains tax have made the whole environment more confusing. Even if it happens, how can it cover the shortfall from the GST (Goods and Services Tax)?
Unfortunately, I haven’t seen the right fiscal policy and, of course, there are people who argue that we don’t need GST. [In my view] GST is the fairest form of tax.
On the much-talked-about soft landing in developed economies
What’s interesting is that people have been forecasting a recession for two years. There won’t be a recession. There have been 15 recessions in the US — big and small — since 1929. The last time a recession was caused by the US Federal Reserve (Fed) was in 1990, which means that for the last 34 years, no rate hike has caused a recession. The second point is that the 5% interest rate is a normal average. It is a level that the US economy is comfortable with.
It takes at least six to nine months for the rate hike impact to hit the economy. You are now seeing a slower economy because of the last rate hike — that’s expected. The US corporate profits are still going up.
On the view of the International Monetary Fund (IMF) that expectations for rapid interest rate cuts are premature as the battle against inflation isn’t over yet
US rate cuts will come in the second half [of the year]. It won’t be fast, with slow cuts. It’s very ironic; for the Fed to increase interest rates, it means that they are confident that the economy is strong. So, actually, rate cuts are bad news. The Fed is not seeing trouble [though] — they are just preparing for that and reducing the rates gradually before the trouble starts.
On weaknesses in China’s economy
The environment in China is quite challenging. The US trade restrictions are hitting the local industrial players quite badly. At the same time, not only foreign players, but even domestic players are looking to shift their facilities out of China. The trade war hitting China is quite severe.
On key risks in 2024 with the emerging crisis in the Red Sea and the upcoming US presidential election in November
The Red Sea crisis is just a blip and not severe. For the US election, usually there is no fixed market trend nine months before that, so the impact on the market is pretty muted.
Now the world and the US are driven by the performance of tech companies. Earnings of these tech companies are starting to recover. So, I don’t see a risk of correction this year. It will do well simply because the tech sector has been under pressure for the last 18 months or two years.
On gold and other commodities, namely oil
Gold price will go up when there is fear of recession or war. But I’m not a believer in gold. It is a non-value producing asset.
The era of low oil prices is over. The new normal is US$80 to US$90 a barrel. We are facing a situation where for the last 15 years, there has been minimal capex (capital expenditure) for exploration. Demand has continued to go up in the last 15 years. Since 2023, there have been many instances of demand outstripping supply. There will be a shorter period where supply catches up, but the longer trend is demand outstripping supply.
Saudi Arabia needs fiscal spending. For the Saudi Arabian government to continue to boost the economy, it needs oil prices to be at least at US$80 a barrel.
Munirah Khairuddin
Country Head and CEO
Principal Malaysia
On key investment themes for 2024
For domestic exposure, we remain [positive] on sectors that stand to gain from the National Energy Transition Roadmap (NETR), including utilities, construction and property. We remain optimistic on selective technology, owing to the ongoing structural growth trends in the sector, which is one of the beneficiaries of the New Industrial Master Plan 2030 (NIM 2030). This master plan is geared towards moving our manufacturing sector up the value chain to more high-technology, high-value-added and complex products, as well as developing our national technological capabilities, which will be instrumental in supporting the high-technology manufacturing economy. We have also become more optimistic about selective [financial institutions] as we expect the positive momentum to persist in the second half of the year, primarily fuelled by better earnings outlook for 2H2023 with limited downside due to attractive dividend yield.
For global exposure, our preference remains on the quality tilt, being selective in segments that showcase good fundamentals and secular growth in the long term such as artificial intelligence, cloud and digital transformation sub-themes. On regional exposure, we remain fully invested and well positioned in the areas [that will benefit from] the bottoming of the tech hardware cycle (for example, dynamic random access memory and foundry), strong private sector confidence in India, as well as selected global names with resilient demand in the areas of consumption, energy and technology.
On whether Malaysia is attractive enough for foreign investors amid expectations of global fund flows to emerging markets, on the back of expected rate cuts in 2H2024 and a weakening US dollar
Valuation-wise, we are attractive but not so much in terms of the ringgit. It’s good that we announced the NETR and some other stuff last year. These gave the market a little bit more hope. It’s all about execution now in Malaysia, making sure that we really execute what we say we’re going to do. Companies in Malaysia really need to start to execute those long-term plans, and then show real accretive value to the share price, and not just because of its cheap valuation.
On the much-talked-about soft landing in developed economies
I’m generally quite positive because I think for the US, there’s still upside and technology plays a big part in that. There is the expectation that the US will cut rates, therefore money will flow to emerging markets. The valuation of emerging markets is very cheap. Malaysia’s forward price-earnings ratio is about 13.5 times and China’s is 11-plus times. I think the money will find where the value is.
On the IMF’s view that expectations for rapid interest rate cuts are premature as the battle against inflation isn’t over yet
I agree, it is still too early. Having said that, the 10-year Treasury yield is about 4%. So, I think markets are already sort of pricing it in. The bond market prices in quite early, at least six to 12 months ahead of what the official headline numbers will be. So, I think the market is very efficient and has priced that in.
On weaknesses in China’s economy
People are starting to buy into China and emerging-market equities because of the valuations. I hope China doesn’t disappoint us.
On key risks in 2024 with the emerging crisis in the Red Sea and the upcoming US presidential election in November
We’re looking at the GDP (gross domestic product) numbers quite closely. If growth is below expectations for two quarters, then it’s probably a sign that the economy is not as resilient as we thought. Bank Negara Malaysia will be watching inflation and growth, and therefore we don’t expect any rate cut this year.
China is something we want to look at. We think maybe it’s the second-half story, with a bit more optimism. However, markets are efficient. At this kind of good valuations for China, we’ll be looking for good stock picks.
On geopolitical risk, I think so far it is not a direct systemic risk to the financial markets. But it is an election year for many countries. It’s hard to see whether the second half [of the year] is going to be tougher because of the political headwinds.
The financial markets tend to be quite independent of the US presidential elections. It’s just that there’ll be noise on the US-China bilateral relations.
On opportunities in bonds
We still like the Malaysian bond market because the credit spreads are still quite interesting. Recently, there was a Government Investment Issue (GII) with four times cover. It’s just so much interest even though the yields were tight. We’re not going to get that high 6% to 7% returns that we saw last year, but it’s still a good 5% to 6%.
Alessia Berardi
Head of Emerging Macro and Strategy Research
Amundi London
On key investment themes for 2024
Defensive sectors are probably the favourites in the first half of the year, and moving towards more cyclical sectors later on.
In the tech sector, being a top-down analyst, I have to recognise that the tech cycle has restarted. Looking at the export trends in North Asia such as Taiwan and South Korea, you clearly see how the tech sector is performing. TSMC’s results were very good. One risk here is the US recession, because clearly the sector is very exposed to the US market.
Dynamically, maybe it’s not exactly the right moment for tech because you need to see a consolidation on the macro side, and we have the US recession as a base case.
On whether Malaysia is attractive enough for foreign investors amid expectations of global fund flows to emerging markets, on the back of expected rate cuts in 2H2024 and a weakening US dollar
In terms of equities, Malaysia is one of the countries in the region that probably is somehow benefiting from this new geopolitical landscape. In terms of value chain and level of production, I think Malaysia is a good competitor in getting foreign direct investments.
The weakness in the ringgit is good for exporters, as Malaysia is a very open economy. However, it is less interesting for fixed income because the currency is weak.
Over the 12-month horizon, the ringgit is the most attractive currency across the emerging markets. What is in consideration is that we don’t have a strong outlook for China, and even the outlook for the Chinese renminbi is not that strong. Normally, this region’s currencies are also correlated to the renminbi, and not just the US dollar. Despite the strong undervaluation, I think the ringgit will remain more on the weaker side.
On the much-talked-about soft landing in developed economies
In general, there will be a deceleration in economic growth globally in 2024 in comparison with 2023, with some differences across regions and countries. In developed markets, with respect to the US economy, it will experience a mild, shallow recession in the first half of 2024. Europe will keep experiencing sluggish growth into 2024. For emerging markets, despite the downward trend in exports, they have been able to remain resilient in terms of growth, in particular the biggest emerging markets — India, Indonesia, Brazil and Mexico.
Considering that inflation is continuing to decelerate and the cooling down of demand, we expect the Fed to cut rates by mid-2024, and this is an important signal for the market.
The performance of the equity markets in the US in 2023 was very concentrated in a few names — the Magnificent Seven [Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla]. Because of the kind of macro backdrop that I was describing, in particular in terms of growth that can imply some moderation [in] profits, we want to start the cautious position in equities. In terms of geography, we prefer Japan, the UK and high dividend stocks.
Progressively, once you digest the US recession, moderation in profits and Fed rate cuts, then you can accumulate more risky assets and move towards US equities.
On the IMF’s view that expectations for rapid interest rate cuts are premature as the battle against inflation isn’t over yet
Our expectations for the Fed and European Central Bank are really dictated by the kind of economic output that we have. Doing it right now would be premature because you still have inflation that is plateauing at 3% and very few signs of deceleration.
On weaknesses in China’s economy
What is important about China is that it is changing structurally. The economic model is changing. It decided to ‘shut down’ some important growth engines, like real estate, meaning that there will be less growth coming from infrastructure investments.
I think at this point, investors and market participants are getting less enthusiastic about the next fiscal stimulus because the disappointment has been more or less continuing in terms of expectations.
The new growth target for 2024 has not been officially announced. It is very likely below 5%. This is an adjustment that China is doing towards a new growth regime and standard. It will still be adequate to accommodate the structural change that China is doing.
On key risks in 2024 with the emerging crisis in the Red Sea and upcoming US presidential election in November
Starting from the Red Sea, it is proof that geopolitical risks are very relevant and they will stay there. We are all monitoring this situation in the Red Sea. Some of these risks can easily be translated into macroeconomic dynamic trends and financial trends. Since the last week of December, freight rates have been jumping quite sharply. The good thing is that on a global level, the impact is less. It is more concentrated on specific routes. In terms of economic impact and inflation, probably the impact will not be evenly distributed. But these geopolitical risks will reflect higher costs — a risk to inflation, outlook and monetary policy. So far, we consider the Red Sea situation a risk, but we are not incorporating that kind of higher costs in our inflation dynamics.
On the geopolitical front, we have plenty of elections this year. When you think about elections, you think about changes. That can trigger risk and materiality, and even continuity is a challenge. For the US elections, it is likely we will have Donald Trump versus Joe Biden. Under the Biden administration, we have seen a lot of continuity of what Trump did. Overall, there will be a continuation of protection, and the world is getting more fragmented. Will this election change this landscape? I don’t think so.
The other important macro risk is the level of debt around the world that is clearly limiting the policy room to [manoeuvre to] face shocks. Europe is now discussing a new fiscal framework, allowing these countries to manage their debt for an extended period of time.
Some emerging markets have had to face shocks after the pandemic, Russia-Ukraine war, energy and food crisis. This is another risk that we have.
On gold and other commodities, namely oil
Gold has been performing. We’ve seen all the asset classes that clearly are very much dependent on the Fed’s action. We still see a marginal upside for gold. On top of that, we have to mention that geopolitical risk is always well [and] alive and that keeps the gold asset class one of the favourites in the case of escalations, as a small risk can escalate to become a bigger risk. So, it is an asset class with a limited downside and a marginal upside.
Oil dynamics have been mainly driven by supply. Oil exporters have been able to adjust the supply in order to get the oil price levels that they want. Now, we are seeing some weakness in oil because of concerns about demand. Our fair value is for WTI (West Texas Intermediate) to be around US$80 per barrel. It is interesting to note that with what is happening in the Red Sea, it has not been able to [move] the needle for oil prices, which remain contained. That means the demand concern and probably different supply players are playing an important role in determining the oil price. But overall, we are quite [positive] despite the US deceleration and minor recovery moving forward.
On opportunities in bonds
Bond is back because finally, you are not in a world with negative yields or low yields any more.
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