This article first appeared in Capital, The Edge Malaysia Weekly on August 12, 2024 - August 18, 2024

INVESTORS were spooked by the global equity bloodbath last Monday, led by the 12.4% plunge in the Nikkei 225, which was caused mainly by the unwinding of Japanese yen carry trade as well as concerns over growth prospects in the US. Other factors that triggered the jitters included poor US tech earnings and rising geopolitical tensions.

Back home, the “Black Monday” crash also resulted in the FBM KLCI plunging 4.6% to 1,536.48 points for its worst day since March 2020. Technology, construction and property were among the worst-hit sectors.

However, the benchmark was quick to recoup most of the losses in the following days to close at 1,590.38 points last Thursday. The KLCI fell 1.3% in the first four trading days of the week, but is still up 9.3% year to date.

Likewise, markets gained some ground after last Monday’s panic selling. Having said that, the episode has the investing fraternity fearing that the carry trade unwind may lead to more volatility in the global market.

The Bank of Japan’s decision to tighten its monetary policy has come under fire, with some economists saying the central bank had not paid attention to economic data.

BoJ governor Kazuo Ueda defended the rate hike decision, however, noting that economic and inflation data were in line with previous expectations.

Interestingly, the US Treasury yield curve has been signalling a recession since it inverted more than two years ago. A recession tends to follow a year after the curve inverts, where short-term yields are higher than longer-term ones. The yield curve, however, briefly uninverted after Monday’s sell-off.

Even though the US economy grew at a higher pace of 2.8% in 2Q, double the rate of the first quarter, the unexpectedly weak US employment report suggests that the job boom in the US might be coming to an end.

As always, the US Federal Reserve’s policy rate — currently in the 5.25%-to-5.5% range — will come under scrutiny. It is widely expected that there will be a rate cut next month, following the lacklustre job data.

For now, given the stabilisation of global markets, analysts and fund managers whom The Edge spoke to believe local equities remain appealing. The following are observations from some of them. 

"We are not making any changes to the investment outlook and strategy, and investors are advised to stay invested.

Although some US tech stocks are [overvalued], the secular trend of tech growth remains, and data centre capex in Malaysia still has some room to grow. I am more positive on stocks that benefit from data centre demand, especially on capex from the data centre sites as well as the related mechanical and engineering works, energy and water supply, piping and cables, substations and equipment such as cooling towers, racks and servers. They are more attractive now after the sell-off. The recovery of the semiconductor industry is underway on the back of demand for AI, IoT, data centres and devices."

"The current level offers good positioning for some blue-chip counters. We expect more upside from here. It is actually a very good accumulation level.

Earnings growth for local corporates in the second half of the year is expected to come in within market expectations, which will continue to support their share price performance.

Over in the US, the earnings momentum for the artificial intelligence (AI) theme is still lacking, with continued allocation of capital expenditure (capex) in this segment. With the capex investment, we should see good earnings, though it may not come so early, and we might need to wait for another quarter or two.

Overall, US corporate earnings will still be able to beat market expectations. The Magnificent Seven [Apple Inc, Microsoft Corp, Google parent Alphabet Inc, Amazon.com Inc, Nvidia Corp, Meta Platforms Inc and Tesla Inc] will need to deliver earnings as strong as possible. Any unexpected disappointment may warrant some sell-down but, overall, the Magnificent Seven will hold well.

Expectations have been building up for the AI counters, and therefore we need a healthy correction phase until the real earnings come in. They are still looking good, [but it is] just [a matter of] at what price to buy into all these US companies.

The US economy is unlikely to fall into a recession and it could just be a soft landing. I don’t think it will be a huge slowdown, although data points to a slowdown in the labour market. US gross domestic product (GDP) growth will remain positive, although data points to a slowdown in the labour market.

A correction could still happen because global equities have been rallying for the past seven months. Any correction phase will be healthy, though it may hit the tech sector because of this unwinding of carry trade. The general tone for the market right now is still positive, and we are supported by earnings, especially for the tech, construction and property sectors.

Considering that the current level is already quite attractive, investors should take this opportunity to buy into some blue-chip counters that have been beaten down, especially in the abovementioned sectors.

Tech stocks might not be rebounding very strongly because of the strong ringgit, but the property, construction and even building material and utility sectors will see some healthy rebound."

"The massive movement of funds that shook the market does not indicate a downturn in the economy. The market will stabilise once these imbalances in funding reach equilibrium.

We believe that massive readjustment of global fund flows was largely responsible for the recent sell-off in the market. Interest rate expectations were likely the trigger [for the] US to cut interest rates and Japan to gradually raise interest rates. For the past few years, fund managers have been earning bonus returns by borrowing cheaply in the Japanese yen to invest in US equities, which were on an extended rally.

As a result of this change in expectations, it triggered global fund managers to unwind US equity trades to pay off Japanese yen borrowings before Japan’s interest costs become expensive. The weakening of the US dollar and a strengthening of the Japanese yen were the side effects.

In the longer term, as the US starts its interest rate reduction cycle, funding will become cheaper in US dollars and equity investing will become attractive again. Thus, we do expect this correction to be temporary and the market will recover eventually.

The market will be volatile in the short term and there could be more weaknesses in the market, but it is difficult to time the market. We do believe the market would recover eventually and this would be a good opportunity to restructure your portfolio and accumulate the right stocks for the next cycle. Furthermore, the Malaysian market was just at the start of an uptrend before being rudely interrupted by factors not [caused by] Malaysia.

Tech will continue to lead the market growth. Incentives and encouragement have been given to promote new technology developments in AI, data centres, chip design and Internet of Things (IoT). The software development sector is included as the government works towards improving productivity and the quality of government services.

Manufacturers and electronic manufacturing services (EMS) players are favoured amid the ongoing US-China trade war and possibly new Europe-China sanctions.

Blue-chip stocks offer more stability and certainty than smaller companies but are not necessarily a better value proposition. So, we would recommend a balanced portfolio for stability and growth. As interest rates are lowered gradually, especially in the US, growth stocks may recover their edge for outperformance."

"For the second half, we are not really looking at sectors specifically but more at the stock-picking strategy.

Our FBM KLCI year-end target stands at 1,750, but we might revise it downward since the trajectory does not suggest that the target can be met. However, the market direction is still on an upward trend."

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