A Brief on Global & Local Markets, Investment Strategy. Week in Review | 3 Jan – 6 Jan 2017

US Labour Data projects optimistic economic growth

The first week of 2017 was one of mixed feelings and jitters for investors across global financial markets. Slightly dovish comments from the US Feds at the start of the week – which cited uncertainties on Trump’s policies and its impact on economic growth – resulted a drop in US Treasury yields to 2.35%. The decline was however short-lived as encouraging US Labour Data  released  last  Friday saw Treasury yields rebounded quickly to end the week at 2.42%

The nonfarm payroll (NFP) data indicated an increase of 156,000 jobs for December 2016. Despite falling short of the 175,000 mark, the US economy managed to introduce more than 2 million jobs for a sixth consecutive year. The 0.40% wage growth which exceeded expectation by 0.10%, along with a low unemployment rate of 4.70% further enforced the positive sentiment on the US economic growth. In addition, the manufacturing and non-manufacturing PMI also depicted encouraging numbers at 54.70 and 57.20 respectively.

We expect the USD to remain strong in the near-term backed by the encouraging economic data. Unlike the rest of the world, whereby central banks are employing a more dovish stance, the recent NFP data is rather supportive of the forecasted 3-rate hike by the US Feds in 2017. On top of that, should Trump’s protectionist policies fall through, the Asian currencies are likely to be adversely impacted.

Fixed income markets to remain well supported

The credit space saw a steady performance last week as investors are gradually shifting back into markets. The emerging block finally saw its first inflow after 8 consecutive weeks of dismal sell-off, namely into Thailand, Columbia, and Russia; with the Russian currency (Ruble) remaining as one of the best performing currencies among the EM nations.

While movements on the domestic front have been minimal in the past week, activities are likely to boost in the near-term as we expect to see a healthy pipeline of primary issuances following the Chinese New Year festival. We anticipate that the new issuances will be well supported, and will likely attract participation from investors who have previously remained on the side lines. Nevertheless, we intend to remain focused on investment grade issuances as we anticipate more favourable opportunities for the primary market in the coming months.

Equity markets and portfolio strategy

The US equity market continues to bull into 2017; further disregarding soaring valuations. Stock indexes rose upon the release of favourable figures from the US Labour data, which saw the S&P’s 500 Index and Nasdaq Composite closed at all-time highs last week.  Rising  confidence on  the promised tax cut under Trump’s administration – which may boost corporate earnings – are also among the key catalysts for the US stock rally albeit the uncertain timeline of the actual implementation.

On the domestic side, despite FBM KLCI ended 2016 as one of the worst performers, there is optimism that the current asset value could prove to be an upside moving forward, as we anticipate a rebalancing of portfolios among investors to shift back into the Malaysian market. In terms of assets, the domestic market provides stronger potential at cheaper valuations, especially against the stronger greenback; which could be attractive from a foreign investor’s perspective.

In addition, we remain optimistic on the infrastructure theme in Malaysia; with expectation for a boost in construction activities following the diplomatic agreement between Malaysia and China, which saw 14 MOUs signed last November. While it is difficult to quantify the direct impact of these projects on the Malaysian economy especially given the introduction of competition in the form of China-based construction names; we think that the approach may be the stimulus needed to spur economic growth. And from a longer-term perspective, we expect  it to be supportive of the industrial/ construction industry.

Crude palm oil prices have remained strong in recent months with companies within the plantation sector set to be the key beneficiaries. As such, our portfolios have participated into the sector via several domestic plantation players, and currently holds an approximate of 10% exposure. Moreover, the restructuring theme as well as the banking industry remains under our radar, as we continue to monitor market developments and remain especially selective on investment names.

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