Market Review & Outlook

Transcription

1 Market Review & Outlook As at March 2019 Overview US US Treasuries (UST) rallied in March, suppressing bond yields to a 15-month low after a more dovish than expected policy update from the Federal Reserve, which downgraded economic growth forecasts and announced it would end its balance sheet runoff by September The FOMC repeated its call for a more patient approach and kept its benchmark federal funds rate unchanged at between 2.25% and 2.50%. Concurrently, the Fed cut its interest-rate projections from two hikes in 2019 to none, and left one hike in On balance sheet reduction, the Fed said it would end the taper of its USD4 trillion portfolio in September, while allowing the mortgage-backed security portion of the portfolio to continue its roll off. Additionally, it also trimmed its estimate for GDP growth this year to 2.1% from the previous forecast of 2.3%, and cut its inflation forecast to 1.8% from 1.9%. EU As expected, the ECB left policy rates unchanged in the recent March meeting. What moved the markets was the decision to leave interest rates unchanged at least throughout Previously, the bank guided that rates will be hiked at least through summer. Concurrently, the ECB will start a series of quarterly targeted longer-term refinancing operations (TLTRO-III) in September 2019 and ending in March 2021, each with a maturity of two years. These new operations will help preserve favorable bank lending conditions and smooth the transmission of monetary policy. In 4Q2018, the Eurozone economy expanded by 1.1%, which was lower than expectation of 1.2%. Malaysia BNM kept policy rate unchanged at 3.25% at its 5 March 2019 meeting. In BNM's Annual Report published on 27 March 2019, the official government GDP growth expectation for 2019 was lowered to a range of % from point estimate of 4.9% made in November 2018 for Budget 2019 (2018: 4.7%). Headline inflation will average % in 2019 (2018: 1.0%). Nonetheless, core inflation is expected to be stable amid the steady expansion in economic activity and absence of excessive demand pressure. BNM Governor said that monetary policy will be data dependent. The governor also said that the decline in inflation rate in the past 2 months is mostly accounted for by lower domestic fuel price and does not reflect pervasive deflationary conditions. [1]

2 Equities GLOBAL EQUITIES The US equity market started the month of March on a weak note on disappointing economic data as well as lack of concrete news on the US - China trade feud. While the FOMC s dovish stance provided cheer to the market, the rally quickly reversed following the release of weaker than expected manufacturing data in the US and Europe. The weak manufacturing activity piled pressure on the Treasury yield curve, which inverted for the first time since more than 10 years, triggering global recession fears. Although enthusiasm over progress in US - China trade talks fuelled support, gains were capped by persistent worries about the state of global economies. For the month of March, the Dow Jones Industrial Index posted a marginal gain of 0.5%. Euro Stoxx 50 Index registered a return of 1.62% despite concerns that Eurozone s economic growth would be dampened by a slowdown in Germany and Brexit uncertainties. Brent crude oil price gained 3.6% MoM to close at USD68/bbl, on the back of US sanctions on Iran and Venezuela along with supply cuts by the OPEC. ASIA PACIFIC EQUITIES The Chinese equity market s strong performance continued in March, with buying activities supported by the government s effort to bolster economic growth through monetary easing (via reserve requirement ratio cuts and liquidity injections) and fiscal stimulus (via tax cuts and infrastructure spending). The Shanghai Composite Index advanced 5.09% MoM and the Hang Seng Index by 1.46% MoM. The Taiwanese equity market also ended higher, up 2.42% MoM with positive newsflow in the semiconductor sector. The KOSPI Index, however, ended 2.49% lower MoM due to downward revisions to 2019 earnings. Meanwhile, the S&P BSE India Sensex Index staged a 7.82% MoM rally on optimism of a rebound in corporate earnings, continued low interest rates and possibility of the current government return to power. The dovish shift among developed market central banks helped fueled the rally of risky assets. Nevertheless, macro challenges may cap further gains. As such, we remained neutral on the market by positioning in more defensive sectors while adding value via bottom-up stock picking. ASEAN EQUITIES ASEAN equities remained lethargic in March amid a combination of profit-taking and global growth worries, closing the month lower by 1.1% in USD terms. Nonetheless, Vietnam continued to buck the trend and outperformed its ASEAN peers as it gained 1.6% MoM. Save for Vietnam and the Philippines (+1.1% MoM), other ASEAN markets were in the red with Malaysia being the worst performer, having declined by 4.1% MoM, followed by Thailand (-1.5% MoM), Indonesia (-0.3% MoM) and Singapore (- 0.2% MoM). With the exception of Dong which was largely flat MoM, other ASEAN currencies performed weaker against the USD. Reversing from being the best performer in February, the Peso depreciated the most (-1.5% MoM), followed by the Rupiah (-1.2% MoM), the Baht (-0.7% MoM), Ringgit (-0.4% MoM) and the Singapore Dollar (-0.3% MoM). In terms of forward P/E multiples, Singapore remains the cheapest and the only market trading below its 10-year average Standard Deviation (SD) at Other ASEAN equity markets are trading above their respective 10-year means with Vietnam maintaining its position as the most expensive market, trading at +1.0 SD, followed by Thailand (+0.9 SD), Malaysia (+0.8 SD) Indonesia (+0.7 SD) and the Philippines (+0.2 SD). We retained our neutral call on most of the ASEAN countries and dialled back Indonesia and [2]

3 the Philippines from overweight to neutral as both countries have performed relatively well year-to-date and election uncertainties around the corner may cap upside. The only country we have an overweight call within ASEAN is Vietnam. MALAYSIAN EQUITIES The KLCI was lower by 3.8% MoM, dragged down by big caps led by banks. The FBM70 and FBMSC performed much better, up by 1.9% and 1.3% MoM respectively. Sentiment was affected by a series of external developments. Investors grew weary of global economic growth, on the back of a shift in FOMC s interest rate guidance which inverted the US Treasuries yield curve coupled with weak February manufacturing PMI numbers from major economies of the world. The EU and Japan s PMIs were particularly weak and dipped below 50, which signal contraction in economic activities. Foreigners were net seller of equities worth MYR1.6 billion, bringing YTD net outflows to MYR1.4 billion. Sector-wise, Financials was the worst performing sector, down by 4.6% MoM on concerns that an interest rate cut would affect margins. On the other hand, Energy and Construction were the best performing sectors, gaining 7.1% and 6.9% MoM respectively. The top three gainers among KLCI components stocks were Press Metal, Sime Darby and AMMB while the worst performers were CIMB, Malaysia Airport and Genting Bhd. Strategy We maintain our defensive stance for all our equity portfolios by anchoring them with high dividendyielding stocks and REITs, while using a bottom-up approach to search for pockets of trading opportunity. We continue to favour sectors such as Financials, Consumer (non-discretionary), Oil & Gas players involved in maintenance, Exporters, selective Technology players and REITs. [3]

4 Fixed Income ASIAN BOND MARKETS In the Asian Dollar space, risk assets continued their upward trend as the market assess positive aspects of a pause in US monetary policy and possible trade deals between the US and China. The High Yield space registered a return of 2.48% MoM while the Investment Grade space posted a return of 2.02% MoM. By countries, the top three gainers were Indonesia (+2.50% MoM), the Philippines (+2.38% MoM), Thailand (+2.35% MoM) and India (+2.35% MoM). Regional local currency sovereign bonds performed stronger in tandem with US Dollar bonds. The Philippines led the pack with a gain of 4.49% MoM followed by Indonesia at 1.83% MoM and India at 1.67% MoM. Global market sentiment shifted from being risk-off in recent months to risk-on, largely driven by possible US - China trade deals and a pause in US rate hikes. These positive developments are now largely priced-in. Moving forward, market volatility would be affected by signs of global growth slowing and trade as U.S. President Trump suggested that a roll back of previous tariffs is not on the horizon yet. MALAYSIAN BOND MARKET Bond market sentiment improved after the Fed, at its March meeting, indicated that they will pause on further rate hikes for the remainder of 2019 due to deteriorating global economic outlook. Consequently, long-term UST yields declined more than short term yields in March This led to the UST yield curve inverting in the three months to 10 years segment, with the 10 Year UST yield falling by 35 bps to 2.40%. The curve inversion and general decline in yields were also driven by the market increasingly pricing in a rate cut in Consensus is currently pricing in 60% probability of at least one rate cut in 2019, on concern of a global economic slowdown. After three consecutive months of net foreign outflows from the Malaysian bond market, foreign funds increased their exposure to Malaysian government bonds by MYR4.9 billion in February 2019 as the improved sentiment towards Emerging Markets cascaded to the Malaysian bond market after some delay. The Ringgit traded between 4.06 and 4.09 against the USD and ended the month flat. Malaysia s foreign reserves continued its uptrend with an increase of USD0.3 billion to USD102.6 billion as at mid- March 2019 (end-dec 2018: USD101.4 billion). Local MYR government bond trading volume grew to MYR102.3 billion from MYR77.9 billion in February. Lower UST yields, weak inflationary environment (Malaysia s CPI reading was in negative territory for the first 2 months of 2019), a dovish March MPC statement combined with lackluster growth led market participants to expect a rate cut in This resulted in yields across the entire MGS curve tumbling, with the 10Y MGS yield falling by 14 bps to 3.77%. The biggest mover was the 15Y MGS which declined by 23 bps to end the month at 4.07%. There were 4 primary government bond issuances in March, the 3Y MGS, 20Y GII, 30Y MGS and 7Y GII which received strong Bid-to-Cover ratios of 3.132x, 2.758x, 1.718x and 2.330x respectively. Corporate bonds rallied as yields fell by around 10 bps for both AAA and AA-rated names such as Danum and Jimah East Power. Newly issued A2-rated IJM Land perpetual bond s yield declined by 18 bps post issuance as yield-hungry investors snapped up the issuance despite its low credit rating. Notable rating movements were the rating revisions accorded by MARC to PLUS from AAA/negative to AAA/stable and Inverfin from AAA/stable to AAA/negative. [4]

5 Outlook for the local bond market is increasingly bullish after BNM struck a more cautious tone in its latest monetary policy statement which point towards downside risks in the external and domestic growth. It said materialization of downside risks from unresolved trade tensions, heightened uncertainties in the global and domestic environment, and prolonged weakness in the commodityrelated sectors could further weigh on growth". The language is perceived to be more dovish than in the past MPC meetings, which led to expectations that BNM may see the need to cut the OPR in the near future. This view was further affirmed by the release of BNM s Annual Report which lowered the 2019 GDP forecast to between 4.3% - 4.8%. Strategy Portfolio Duration With prospects of a rate cut increasing this year, we maintain our overweight position on portfolio duration relative to benchmark. With a Fed pause and a dovish BNM, bond yields will at least remain supported in the near term. Security Selection The rally in MGS/GII has resulted in credit spreads widening, as corporate bond yields lagged the compression seen in government bond yields. As such, we would overweight corporate bonds over government bonds for yield pick-up. Government bonds will be the preferred segment for short-term trading owing to its better liquidity. Disclaimer: In preparing this material, AmFunds Management Berhad( A) has relied upon the accuracy and completeness of relevant information available from public sources. AmFunds Management Berhad does not warrant the accuracy, adequacy, timeliness or completeness of the information obtained from the public sources for any particular purpose, and expressly disclaims liability for any error, inaccuracy or omission. AmFunds Management Berhad and its employees shall not be held liable to you for any damage, direct, indirect or consequential losses (including loss of profit), claims, actions, demands, liabilities suffered by you or proceedings and judgments brought or established against you, and costs, charges and expenses incurred by you or for any investment decision that you have made as a result of relying on the content or information in this material. You shall assume full responsibility for your use of any content or information in this material and waive all your rights (if any) against AmFunds Management Berhad. The information contained in this material is for general information only and does not take into account your individual objectives, financial situations or needs. You should seek your own financial advice from a licensed adviser before investing. You should be aware that investments in unit trust fund(s) carry risks. This material may be translated into languages other than English. In the event of any dispute or ambiguity arising out of such translated versions of this material, the English version shall prevail. AmFunds Management Berhad s Privacy Notice can be accessed via and is made available at our head office. [5]