A Brief on Global & Local Markets, Investment Strategy.
Week in Review | 9 – 13 July 2018
Data Dump from US & China
US inflation grinded higher in June, where the CPI edged up 0.1% m-o-m. On a y-o-y basis, the CPI rose 2.9% in the 12 months through June beating market expectations. However, wage growth stayed muted increasing by 0.2% in June after it grew 0.3% in May.
The moderate wage growth calmed fears of a more aggressive rate hike-cycle, where the latest labour data suggest more breathing room for the Fed to tighten. With less build-up of inflationary pressures, the inflation trend suggest that the US Federal Reserve could stay on its path for gradual tightening in its monetary policy.
Markets have priced-in one more rate hike in September and a 40% likelihood of a rate hike in December. This would bring the total number of rate hikes to 4 in 2018, if the Fed raises rates in December. Whilst, the outlook is less uncertain for now with trade tensions escalating, the market is guiding for less than 2 rate hikes in 2019.
Last week also saw a slew of economic data from China. The M2, a broad measure of money supply that covers cash in circulation and all deposits, grew below expectations at 8.0% y-o-y in June, down from an 8.3% increase in May. Whilst, the M1 which covers cash in circulation plus demand deposits, rose 6.6% y-o-y in June.
Although total money supply has declined, there was a pickup in new loans where Chinese banks extended over 1.84 trillion in new yuan loans, up from 1.15 trillion yuan in May according to central bank data.
Fresh Salvo Fired In Trade War
The US fired fresh salvo in its trade conflict with China, where the Trump administration released a list of $200 billion in Chinese goods that could be subject to new tariffs. The announced duties will only take effect following a review process that is likely to take place between October & November. The latest tariff announcement come on the heels of the $34 billion tariff in Chinese products that took effect earlier in the month.
With the ball now in China’s court to respond to the tariffs, there may be implications to Beijing as it cannot retaliate fully with the same kind of magnitude. The US imports about $500 billion worth of goods from China, whereas China imports only $135 billion worth of goods from the US.
Beijing could instead respond by imposing tariff at double the rate of 20% on the remaining $100 billion worth of US imports to match the US. Alternatively, it could even impose duties on US imported services, where the US currently enjoys a net surplus with China on the services-side. Both options have implications to market that would exacerbate volatility and shave-off growth.
Asia Sees Technical Rebound as China Softens Trade Response
Asian markets rebounded last week, as a relief rally led gains in equity gauges coming from the lack of any retaliatory measures so far by Beijing on trade tariffs. Notable market gainers include the Shanghai Shenzhen CSI 300 index that gained 3.8%, whilst the broader MSCI Asia ex-Japan index closed higher at 1.6%.
From a technical standpoint, markets have also reached an oversold level with indicators like the relative strength index (RSI) signalling undervalued conditions. Valuations of Asia ex-Japan equities have hovered below its long-term mean average and could appear cheap depending on which sector or stock.
On portfolio positioning, we continue to nibble for our Asian portfolios. These include domestic-driven sectors and stock specific names that are less impacted from trade tariffs such as Chinese-listed education providers and IT company Chinasoft Ltd that derives the bulk of its revenues domestically. We remain conservative in our asset allocation with the invested-level across our Asian portfolios ranging between 50% – 55%.
Markets will soon turn their attention to earnings season that has just begun. Specific sectors could be hit more adversely due to trade tariffs that would directly impact their bottom-line. Widening policy divergence has also led to the emerging market (EM) rout, with the US Federal Reserve continuing on its tightening path and other global central banks such as the People’s Bank of China (PBoC) easing policy and pumping liquidity instead. A high correlation between currencies and stock market has also led to Asian currencies touching YTD-lows with the JP Morgan Asia dollar index (ADXY) down 3.2% YTD.
Updates on Malaysia
On the domestic-front, the local market tracked regional gains as regional markets rebounded due to lack of a vocal response from Beijing on trade tariffs.
The benchmark FBMKLCI gained 3.5%, as the construction sector saw a reprieve after the Ministry of Finance (MOF) allowed the LRT 3 project to proceed but at a lower all-in cost of RM16.6 billion with selected components displaced and the timeline extended.
However, structurally the sector will continue to see challenges as construction players could see their margins squeezed as the overall contract value and size of projects are scaled down.
In a briefing with local fund managers, the Council of Eminent Persons (CEP) headed by chairman Tun Daim Zainuddin guided asset allocators on policy clarity & direction of the new government; where it asserted its commitment to reforms including restructuring of GLCs & GLICs, curbing corruption and restoring civil liberties.
Markets would need more time to adjust to such a ‘hard’ reset of markets, before it is on a more stable footing again in the absence of any growth policies. According to news reports by The Edge, the potential restructuring of GLICs such as Khazanah including a potential selling-off of its strategic assets could trim over 12% of the government’s debt in its balance sheet. On the flipside though, this could suck away liquidity from the market especially in the midst of a rate-hike cycle.
On monetary developments, Bank Negara Malaysia (BNM) held the Overnight Policy Rate (OPR) unchanged at 3.25% with a more neutral outlook with downside risks to growth as a result of trade tensions. According to BNM, Malaysia’s positive growth performance is expected to be sustained, driven by both domestic and external demand.
Inflationary pressures could build-up after the tax-break where the Sales & Services Tax (SST) will take effect in September. The 10-year MGS bond yield briefly touched 4.07% before BNM’s MPC meeting, but rebounded later in the week to 4.10% – 4.11%.
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