23 August 2024 Weekly Market Recap

1. This week, global financial markets extended their rally after the US Fed signalled that interest rate cuts are imminent, reinforcing expectations that the central bank will begin easing monetary policy in September. In developed markets, US experienced the largest gains, followed by the Europe and Japan.
    
2. Across Asia, the overall performance was positive. The largest gains were led by Thailand and Indonesia, while China onshore and Taiwan led the decline. In Malaysia, the FBMKLCI achieved modest gains amid the return of positive sentiment in the regional market.
    
3. In the bond market, the US 10-year Treasury yield edged closer to the 3.8% range as markets continued to assess the magnitude of Fed rate cuts this year. (It's worth noting that bond prices move in the opposite direction of bond yields.)

1. In the United States, the Bureau of Labor Statistics' recent revision showed that US job growth for the year ending in March 2024 was weaker than initially reported, with 818,000 fewer jobs added. This has raised concerns about a softer labour market. The revision coincided with signals of incoming rate cuts by FOMC members, as per the latest minutes release. Policymakers noted that a September cut is likely appropriate, thereby strengthening expectations that the Fed will deliver 100 basis points or more in rate cuts in their three remaining decisions this year.²
    
2. In Europe, annual inflation rose to 2.6% in July from 2.5% in the previous month, aligning with the preliminary estimate and surpassing initial market expectations that it would slow to 2.4%. The core rate, excluding energy, food, alcohol, and tobacco, remained unchanged from the previous month at 2.9%, surpassing initial market expectations of 2.8%. Construction activities rose by 1% year-on-year in June 2024, following a downwardly revised 2.1% slump in the previous month. This marks the first increase in construction activity since January of this year.³
    
3. In China, the PBOC left key lending rates unchanged at the August fixing, in line with market forecasts. The one-year loan prime rate (LPR), the benchmark for most corporate and household loans, was maintained at 3.45%. Meanwhile, the five-year rate, a reference for property mortgages, was retained at 3.85%. Both rates remain at record lows following unexpected rate reductions in July. Chinese authorities recently stated they would avoid any “drastic” measures for the economy, but the central bank will accelerate the implementation of existing financial policies, study new steps, and support proactive fiscal measures. ⁴
    
4. In Malaysia, the trade surplus plunged to MYR 6.4 billion in July from MYR 17.4 billion in the same month of the previous year, significantly lower than market estimates. This was attributed to softer exports, which grew by 12.1% compared to imports that rose by 24%. The annual inflation was at 2.0% in July, coming slightly less than market expectations of 2.1% while keeping unchanged for the third straight month. Figures stayed at their highest level since August 2023.⁵

The recent rebound in markets underlines the views that investors should avoid overreacting to bouts of volatility. Our base case remains for an economic soft landing in the US, with the Federal Reserve starting to ease policy at its September meeting. As markets continue to react to incoming data and headlines, we maintain the view that investors should ensure their portfolios are well diversified and focus on quality. We have a slight preference for equities over fixed income. Fixed income has outperformed equities since mid-June. Asian equities look favourable with earnings growth of ~10% in 2025 and a PE of 13x.

1. We find bonds appealing with the potential for capital gains as we perceive that the global rate-cutting cycle remain on track. Therefore, we maintain our preference for investment grade bonds with longer durations as our preferred investment choice. For Malaysia, the projected improvement to the budget deficit, as provided in the Budget 2024, has improved the outlook for domestic bonds.
    
2. On equities, we prefer quality and dividend-paying stocks for their defensive characteristics, which can provide resilience in the face of uncertain macroeconomic and geopolitical conditions. Our positive outlook is focused on Asia and includes strategic positions in various areas: a) the bottoming tech hardware cycle, b) long-term growth potential driven by low penetration rates (such as India), c) recovery plays and structural themes in ASEAN, d) selective sectors with high dividends in China, and e) Malaysia's growing optimism due to political stability and potential gains from the New Energy Transition Roadmap, the New Industrial Master Plan 2030 and projected improvement to the budget deficit detailed in the Budget 2024.
    
3. We also favour diversification approach to ride out volatilities arising from geopolitical tensions, inflationary issues, and concerns of economic slowdown.