MARKET REVIEW & OUTLOOK February 2018 1.0 Fixed Income Economics During the month, Malaysia s 4Q2017 GDP was released. Real Gross Domestic Product ( GDP ) grew 5.9% YoY, slightly slower than the 6.2% recorded in 3Q2017. The slower pace was dragged down by slower export growth. Full year growth was stellar at 5.9%, the fastest in three years supported by a surge in exports, and resilient domestic demand. Full year current account ( CA ) surplus in the balance of payment remained healthy at RM40.3b or 3% of GDP (2.4% GDP 2016). Malaysia s Consumer Price Index ( CPI ) for January 2018 moderated further to 2.7%, a significant drop from the 3.5% increase in the previous month. The slowdown in inflation mirrors the transport inflation trend which continues to enjoy stable crude oil prices in recent months and a slower rise in the Food & Beverage component. Meanwhile, core inflation remains well controlled at 2.2% YoY. On the trade front, Malaysia's export growth in January surged 17.9% from a year earlier underpinned by growth in all major sectors and increased trade with its major trading partners. In line with exports, imports growth also surged 11.6% YoY during the same month, resulting in a trade surplus of RM9.7b. Exports of manufactured goods saw the most growth of 20.4% to RM68.34bil, accounting for 82.5% share of the country's total exports. Meanwhile, Malaysia s foreign reserve as at 15th Feb 18 was reported at USD103.6b which is sufficient to finance 7.1 months of retained imports and 1.1 times in short-term external debt. Page 1 of 6
MGS Market Trading in the MGS market dropped to RM46.1b from RM60.5b in the previous month due to the festive holidays. While there was some bearish steepening at the front to belly of the curve, the MGS yield curve remained well supported considering the greater spikes and volatilities in global yields As at end February 2018, 3-year, 5-year, 7-year, 10-year, 15-year, 20-year and 30-year close at 3.41% (Jan: 3.36%), 3.74% (Jan: 3.72%), 3.97% (Jan: 3.96%), 4.06% (Jan: 3.93%), 4.44% (Jan: 4.37%), 4.63% (Jan: 4.63%) and 4.86% (Jan: 4.90%) respectively. In the primary market, there were two government bond auctions as follows: RM3.5b 10-year Re-opening of the MGS 11/27 which garnered BTC ratio of 2.07 times at average yield of 4.055%. RM3.0b 7-year new issuance of GII 8/25 which drew a BTC ratio of 2.28 times at average yield of 4.128%. Corporate Bonds Market Similar to the government bond market, trading volume in the corporate bond market also dropped to RM7.1b from RM10.4b in the previous month. Investors interest remained focused towards the AA segment at 53.2% versus the higher graded bonds at 39.3%. The primary market was fairly active in spite of the shorter working month. Notable issuers included DanaInfra (GG) RM4.0b, MKD Kencana (GG) RM1.2b, AmBank related entities (AA3 & AA1) RM550m and Country Garden (AA3) RM200m. There were no significant rating actions during the month. Page 2 of 6
2.0 Market Outlook Following the release of the Federal Open Market Committee ( FOMC or Fed ) January policy meeting minutes and the subsequent heightening expectations of more aggressive Fed rate hikes, US Treasuries spiked to multi-year highs before easing off towards the end of February. While the Fed s gradual tightening policy remains in place given the strengthening economic outlook, there is a growing awareness of the possibility of an acceleration in inflation expectations in the year to come and its impact on the pace of the Fed rate hikes. As we have mentioned before, the threat of an increase in the interest rate trajectory is something the market is wary off and we foresee more volatilities across all asset classes throughout the year. In the near term, investors will be focusing on the FOMC meeting on 21 March 2018 where there is an almost near certainty that the Fed will raise the rate by another 25bp. Back home, the Central Bank is expected to stay put in the upcoming Monetary Policy Committee ( MPC ) meeting this month while the release of the Bank Negara Annual Report slated for the end of March will provide further color on the state of economy and in particular, the macro outlook of the country. As such, we believe investors will continue to be guided by external economic developments and in recent weeks, the impact of new trade policies emanating from the United States. Page 3 of 6
3.0 EQUITY Global market review and strategy Dow Jones ended the month of February on a negative note, losing 4.31% m.o.m. The stock market underwent a dramatic sell down in the first week of February as US bond yields soared following the release of a strong US jobs reports showing wage growth improved, which increases prospects for a faster pace of inflation and interest rates hike. After being down by about 10% from the record high it reached on 26 th January, the market managed to gain some ground on favorable macro picture and better than expected fourth quarter earnings releases. Stoxx 50 also ended the month lower by 4.72%, reflecting the negative momentum in the US stock market. Meanwhile, positive data continues to flow in for the Eurozone, indicating 2018 economic outlook remains bright. Eurozone GDP rose 2.5 percent in 2017, with growth being broad based across the region, while inflation remains was at 1.2%, below the European Central Bank s 2% target. We continue to be positive in China and Korea while neutral on Taiwan. China economic growth is forecasted to moderate slightly as policymaker focus on quality of growth. However, supply side reforms should improve efficiency and elevate corporate earnings in the longer term. Household consumer consumption remains resilient on buoyant job creation and rising incomes. For Korea, better corporate governance and potential improvement in shareholders return, coupled with normalization of South Korea China relations are catalyst to market. Taiwanese technology sector will continue to be supported by the global growth pick up as well as semiconductor restocking while staying selective on non-tech. India has seen earnings disappointment the past few years. Expectation started off the year high and dwindles down towards the end of the year. This time around, earnings should meet expectations given synchronized global growth, economic reforms (GST, Insolvency Banking code), and better monsoon. We maintain Neutral on India. With the exception of Singapore, ASEAN stock markets are still trading above +1SD above their historical mean (forward P/E). YTD performances for ASEAN markets are positive with the notable exception of the Philippines, which has seen a reversal from its popularity last year with foreign outflows from equity. Vietnam continues to the best performing market in ASEAN by far, and trades at a premium to its ASEAN peers. We continue to be more cautious on Indonesia and the Philippines due to the weaker fundamentals for their currency against the USD in an environment of normalizing rates in the US. Locally in Malaysia, the 4Q17 GDP expanded at a healthy 5.9% y.o.y, although slowing from 6.2% y.o.y pace in 3Q17, mainly on some moderation in exports, while domestic demand remaining resilient. Expansion was driven primarily by private consumption, which contributed 3.6% to headline growth, followed by government consumption (1.1%), fixed investment (1.0%), and net exports (0.5%). Full-year growth was a stellar 5.9% y.o.y for FY2017 (FY2016: 4.2%), outperforming the government s 5.2-5.7% forecast in the 2018 budget announcement but in-line with market consensus expectations. For FY2018 the government has moderated the GDP forecast down to Page 4 of 6
5.0-5.5%. The strong growth was mainly due to the resurgence of the external sector in FY2017. FY2017 export growth is at a 13-year high of 18.9% (FY2016: 1.2%). Similar to exports, full-year imports growth was also strong at 19.9% (FY2016: 1.9%). Cumulative trade surplus for Jan-Dec 2017 is up 10.3% y.o.y. However, exports growth moderated in Dec 2017 to 4.7% y.o.y (Nov 2017: 14.5% y.o.y). Imports also rose at a slower pace of 7.9% y.o.y (Nov 2017: 15.2% y.o.y) with both intermediate and consumption imports falling 0.7% y.o.y and 2.6% y.o.y respectively, although capital imports jumped 35.2% y.o.y due to lumpy transport equipment sector. Global markets went through a volatile session in the month of February. There were concerns among investors that led to some sell downs in the markets but we view them as healthy corrections rather than bear market. The key concerns that dragged the markets were namely 1) overheating US economy that would lead to more rate hikes; 2) higher inflation expectations; and 3) possibility of a trade war globally. These market noises would create further volatility in the market going forward but we believe the market should remain positive in the near term. Global markets are well supported by 1) the ongoing stronger global synchronized growth; 2) positive global leading economic index and 3) fiscal policy supportive for growth globally. Local market in Malaysia went through a similar volatile month as investors digested uninspiring 4Q17 corporates results. However local market will continue to be supported by 1) stronger than expected GDP growth; 2) its laggard performance as compared to regional peers; 3) oil price recovery that would improve sentiment; 4) Ringgit recovery outlook driving further foreign inflow; and 5) upcoming general election booster. Locally, we remain positive in sectors such as financial, oil & gas, consumer staples, externally driven small and mid-cap stocks and thematic play for the upcoming GE14. Page 5 of 6
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