A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 17 – 21 July 2017

Draghi’s Delicate Balancing Act

Balancing verbal acrobats, European Central Bank (ECB) president Mario Draghi sought to calm market jitters at its policy meeting last week, whilst preparing the ground for an eventual shift to a normalisation of monetary policy and an end of the easy-credit era. The ECB left interest rates unchanged and maintained its current pace of bond purchases on Thursday, until at least inflation is on a clear ‘upward path’ according to Draghi.

The ECB chief faces the delicate task of gradually removing some of its stimulus and ultra-accommodative policies, whilst threading carefully to avoid spooking markets which have grown used to the support and sapping growth in the region.

He commented further on discussions involving the bank’s quantitative easing (QE) programme, with an announcement expected at its September meeting, to begin tapering of its large bond-purchases by early-2018. The Euro strengthened to its highest level in nearly two years against the greenback, rising to trade at US $ 1.16 on Friday.

Trump Stamps Six Months in Office; 2Q Earnings Season Begins

Meanwhile, Trump marked six months into his presidency, bogged down by continued scandals as special counsel Robert Mueller was sent in to lead the probe into alleged interference by Russia into the US Presidential Elections last year and Trump’s business dealings.

The dollar saw some sell-down last week, with Treasury yields hovering lower between 2.2% – 2.3%, as heightened uncertainty surrounding Trump’s administration cast possible distractions in implementing its pledged policy reforms.

Notwithstanding, it is currently earnings season in the US, with 90 of the S&P 500 firms announcing results which exceeded expectations, and earnings seen surprising on the upside by 5%. With lower bond yields, and the positive earnings revision – markets are expected to sustain its performance and continue to do well.

Windfall for Felda Settlers Fuels Election Rumour

Over the weekend, Felda settlers received a windfall from the government in the form of a special cash-incentive of RM5,000 to eligible families, as well as several debt-forgiveness incentives to absolve replanting debts of settlers and reimburse partially of loans taken to buy shares in listed-entity Felda Global Ventures (FGV).

According to media reports, the total aid amounted close to RM1.4billon, or RM15,000 to RM20,000 per settler, fuelling further speculation that elections are looming ahead – as the incumbent administration attempts to shore up support within Felda settlers that account for 54 of the 222 parliamentary constituencies. A crucial voting bloc to secure in the next election, on the back of growing discontentment concerning ongoing graft investigations into FGV.

Meanwhile, macro-data in the docket showed Malaysia’s consumer price index (CPI) dipping lower at 3.6% y-o-y in June, compared with a 3.9% increase in May – pointing to moderating inflation. This has strengthened consensus among economists that Bank Negara Malaysia (BNM) is unlikely to raise the overnight policy rate (OPR) further this year, as real interest rates remain in negative territory and GDP growth remains strong. Thus, there is no impetus for BNM to hike rates especially in a politically sensitive environment with elections ahead.

On local equities, it continues to be a quiet period for markets as it resumes its consolidation phase since the start of June. Expect some excitement though, as Invest Malaysia 2017 kicks-off on Tuesday leading to possible deal announcements, which could draw further foreign participation and inflows.

Within the fixed-income space, MGS yields retreated on the short end of the curve, shifting lower by 2bps to 8bps across the board, in-line with movements with Treasury yields. Volumes remain healthy supported by local players, as the strengthening Ringgit could spur further foreign inflows. Bond investors are expected to trade more cautiously this week, as they seek guidance from the upcoming US FOMC meeting on Thursday.

EMs See Rebound in Inflows

Markets continue to perform well, propped up by strength in regional currencies which have held up against the greenback, especially within the EM and Asian space. The MSCI Asia ex-Japan index was up 2.7% last week, whilst the Singapore Straits Times Index (STI) was seen leading the charge among regional indices inching up by 3.6%.

Much of the movement within the STI was due to a privatisation exercise involving SGX-listed property firm Global Logistic Properties (GLP), and investors reinvesting the proceeds into other Singapore stocks which boosted the market.

At the bottom, Indonesia continues to be a drag lagging behind in terms of inflows, with the Jakarta Composite Index also down 0.2%. However, regionally EMs saw a rebound in inflows by over US $2 billion into the markets last week, buoyed by strength in regional currencies vis-a-vis a weaker US dollar.

China Reins in ‘Gray Rhinos’

China authorities are swooping in on its ‘gray rhinos’, as regulators signalled a tougher stance to hone in on its unrelenting debt-build up, and to gradually begin its deleveraging exercise.

Large Chinese conglomerates including Anbang Insurance Group, Fosun International, HNA Group and Dalian Wanda Group were the main targets, as regulators sought to clamp down on their overseas acquisitions and prohibit local banks from providing financing to these 4 firms.

Recent news also point to US banks steering clear away from providing advice or financing on any possible deals/transactions relating to these groups, over fears of tighter business restrictions and capital controls.

Regards to our portfolios, we do not have any holdings in these 4 firms and will also stay away from holdings in companies which have assets or significant dealings with them.

Meanwhile, China’s economy continues to gather steam – as economic indicators point to 2Q’17 GDP growing at an above-expected pace of 6.9% y-o-y, alongside stronger than expected June retail sales numbers and higher Industrial Production growth. China’s FX reserves remains stable at above US $3 trillion. Outcomes from China’s National Work Conference the week before yielded positively, where we saw Beijing reiterate their stance to contain financial risks and deepen reforms in the country.

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