Tailwinds for Bursa Malaysia in 2024, but US may spoil the party

 

Bursa Malaysia will gain from increased foreign inflows as the US Federal Reserve cuts interest rates in 2024.

PETALING JAYA: The Malaysian equity market dodged a bullet in 2023 as the anticipated downturn in the US turned out to be a non-event.

Like it or not, Bursa Malaysia, like most Asian markets, takes its cue from the US equity market. However, 2024 may not be so benign as market analysts think a hard landing for the US economy remains a distinct possibility.

“2023 took investors by surprise in many ways. The much heralded recession in the US did not materialise as its economy held up remarkably well,” Aham Asset Management said in a recent report.

“So far, global economies have held up well despite tighter financial conditions this year. However, monetary policy often works with a lag, and we may see US and global GDP growth soften in 2024 as demand subsides.

“While the risk of a hard landing cannot be ruled out, it is tempered by the return of the ‘Fed put’ as inflation continues to ease,” it added.

After raising interest rates by 500 basis points (bps), the US Federal Reserve (Fed) recently signalled it was done with hiking rates and would likely start cutting in 2024.

Tailwinds for Asia from Fed pivot

Aham said emerging markets (EMs) and Asia were in prime position to benefit from the Fed’s dovish pivot.

In the past five hiking cycles since 1995, EMs displayed strong outperformance benefitting from an influx of foreign flows and a waning US dollar after the last Fed hike, it said.

With the focal point of markets shifting away from rate hikes to a rate pause, the asset manager sees conditions turning “more conducive for equities” through a more stable interest rate outlook.

This could prove positive for the Malaysian market. There have been encouraging signs pointing to a return of foreign inflows since July 2023, thanks to an improving domestic macro situation, it noted.

“Historical patterns suggest a strong correlation between KLCI returns and foreign flows as seen over the past 10 years.”

Another key catalyst for Bursa Malaysia is corporate earnings which are expected to recover from a low base, it said.

Aham Capital chief officer of product solutions and customer experience Anton Tan highlighted the importance of monitoring geopolitical risks in 2024.

“Despite recent easing tensions between the US and China, the proximity of the US presidential election and general elections in countries like India, Taiwan, and Indonesia pose potential risks,” he said.

“Investors should remain vigilant as geopolitical events have the potential to influence market dynamics.”

US remains a key risk

The US market has been on a tear this year with the Dow Jones Industrial Average (DJIA) closing at a new all-time high on Wednesday, and the S&P 500 hitting a 52-week high, a mere 0.5% from its all-time high.

The DJIA and S&P 500 are poised to end 2023 higher by 13% and 24%, respectively, while the Nasdaq Composite has jumped 44%.

While many investors are expecting the US indices to go even higher next year, Pheim Asset Management Sdn Bhd executive chairman and chief strategist Tan Chong Koay called for caution.

Tan Chong Koay.

“The US market is very overvalued. The US is the leader as far as equity investors are concerned.

“So when the US corrects, markets around the world, including Bursa Malaysia, will follow suit. You need to be a bit cautious. Definitely, you should not be fully invested,” he added.

On the possibility of a black swan event in 2024, Tan noted that since 2020 the world had seen various crises – the Covid-19 pandemic, Russia-Ukraine conflict, and now the Gaza crisis.

He said crises come in many ways. “You can have a company crisis, an industry crisis, or a market crisis,” he said, adding that investors should be prepared to capitalise on such crises by buying good stocks at bargain prices during market downturns.

He cited the example of a similarly bullish US market in early 2020. The DJIA had done well in 2019 and was up 23.4% for the year. It continued rising, moving into January 2020, until the Covid-19 pandemic hit the US in full force.

“Between Feb 12, 2020 and March 23, 2020, the DJIA crashed 11,355 points, a 38.4% drop within five-and-a-half weeks, the biggest drop in history for that time period,” Tan said.

During the same period, indices in Asean countries dropped substantially from -35.75% in the Philippines to -18.35% for the KLCI. Malaysia’s small-cap index (FBMSC Index) saw an even bigger drop of -42.77%.

Interestingly, in the subsequent market recovery, the FBMSC Index was also the big gainer among Asian indices, posting a 102.43% surge as of Dec 31, 2020 from its lowest point in February 2020, he said. - FMT