A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 15 – 19 April 2019

 

Treasury Yields Climb on Stronger US Data

US retail sales rose 1.6% in March its strongest pace since September 2017, the latest indication that economic growth appears to be picking up after a slow start to the year. A key data point to monitor would be 1Q’19 US GDP slated to be released this week, with economists forecasting growth to come at 2.2%.

The GDP data would also be reflecting the partial government shutdown in the US, its longest in history which lasted for 22 days. Any surprise on the upside to GDP data would be a boost for risk markets.

Conditions have seemingly turned on the macro-front ever since the yield curve inverted in March’19 which triggered a knee-jerk selldown in markets over recessionary fears. With latest data now painting a more upbeat economic picture, the Atlanta Fed GDPNow forecast model which estimates GDP growth based on latest available data expects US GDP to expand to 2.8% in the 1Q’19 from a low of 0.5%.

It was a mixed bag performance for Europe with Germany and France reporting weaker than expected manufacturing data. Whilst, the overall PMI came above 50 indicating expansion, the manufacturing component which is more prone to cyclical factors surprised on the downside.

On the back of better performance for risk assets, the US 10-Year Treasury yield sold off to 2.60%. But yields subsequently came off as we saw some buying towards the end of the week ending at 2.56%. Fed fund futures are now pricing-in a partial rate cut in 2020 and a pause in 2019.

Regionally, exit polls show Indonesian President Joko “Jokowi” Widodo on course for a second term in office, moving comfortably ahead of his rival, former military strongman Prabowo Subianto. Local govvies and IDR-denominated government staged a strong rally with the incumbent Jokowi set for re-election giving him another 5 years in office to deliver on reforms. Hard-currency corporate bond issuances also had a strong showing.

Asian Markets Gain on Strong China GDP Data

Asian markets continued its hot streak buoyed by strong economic data from China which beat expectations. China’s economy grew 6.4% in the 1Q’19 easing growth fears in the world’s second largest economy as stimulus measures introduced by Beijing begin to take effect. The Shanghai Shenzhen CSI 300 index rose 3.3%, whilst the broader MSCI Asia ex-Japan index edged 0.2% higher.

China has set its own growth target to range between 6.0%-6.5% for 2019, so its latest GDP data which reached the upper bound of that range is encouraging.

China released a slew of other economic indicators including industrial production which jumped 8.5% y-o-y in March. Retail sales also grew by 8.7% y-o-y as consumer sentiment improves. Fixed asset investment (FAI) which is a measure of capex spending increased by 6.3% y-o-y with easing of monetary conditions leading to improved access to financing. Its property sector also showed signs of recovery with better sales and new construction starts by floor area that surged 11%.

With China’s economy off to a strong start in 2019 following a bitter trade conflict with the US which shaved off growth, its top-decision making body the politburo has shifted its tone to suggest a pause in easing measures given the more upbeat set of data.

This week will see China hosting its Belt and Road summit in Beijing starting Thursday with leaders from 37 countries slated to attend including Malaysia. Market expectations for the summit has toned down slightly with collection issues cropping up as well as projects not being profitable for Chinese firms. However, individual countries could stand to benefit depending on specific structures of each agreement.

Other notable market gainers last week include Indonesia’s Jakarta Composite Index which climbed 1.6% as markets cheered incumbent Jokowi’s expected win at elections.

Updates on Malaysia

On the domestic-front, the local market sold-off on the back of news that index provider FTSE Russell may drop Malaysian bonds from its global index dampening investor sentiment and triggering outflows. According to the Edge, FTSE Russell said it would review Malaysia’s market accessibility level in its World Government Bond Index (WGBI) due to concerns about market liquidity.

Malaysia could potentially face total outflows of US$ 7-8 billion dollar in the event of an exclusion from the WGBI with Malaysia making up 40bps of the index. Passive outflows which is the more susceptible component could see outflows totalling US$2-3 billion.

However, ample domestic liquidity would be able to shore up the bond market and absorb any shocks due to foreign selling. A final review by the index provider is due on September’19.

News on the revival of Bandar Malaysia lifted construction stocks with counters linked to the project including Iskandar Waterfront City Bhd (IWCity) and Ekovest Bhd hitting limit-up. In a press conference last week, Prime Minister Tun Dr. Mahathir said the project which was abruptly terminated in May’17 would be reinstated and awarded back to the original IWH-CREC Sdn Bhd consortium.

The project will include the construction of a People’s Park, 10,000 units of affordable homes and priority for the use of local content in the construction process according to the Edge.

Market expectations are also for the potential revival of the Kuala Lumpur-Singapore high speed rail (HSR). Under the original plan, the 486-acre development in Sungai Besi was to host the terminus of the HSR. With an implied pricing of RM550 per square foot, the property development project is unlikely to command such a high premium without it being also a transit hub for HSR.

Tun Mahathir will be making another visit to China to attend the Belt and Road summit in Beijing later this week. There could be a play on China-related themes for the local market with FDIs flowing back to the country and Chinese MNCs looking to set-up shop domestically, as well as the return of Chinese tourists.

The government is seen shifting its tone towards becoming more growth-oriented on a string of recent by-election losses. With low expectations and foreign net outflow accelerating to RM2.50 billion YTD according to MIDF Research, we see technical conditions turning more favourable with room for upside once there is more positive incremental news flow and plenty of cash on the side-lines.

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