by RUPINDER SINGH / pic by TMR FILE 

LOOKING ahead, the market outlook for the second half of 2023 (2H23) remains uncertain.

Several key factors will play a significant role in determining the direction of the FTSE Bursa Malaysia KLCI (FBM KLCI) and investor confidence. Featuring prominently are the impending elections in six states and the state of the global economy.

It goes without saying that the upcoming state elections in Selangor, Negri Sembilan, Penang, Kedah, Kelantan and Terengganu have the potential to exacerbate political uncertainties. The results of the Aug 12 polls would have implications for the policy landscape and economic direction of the country. Investors will closely monitor the election outcomes and assess their potential impact on the market.

The global economic conditions, particularly the performance of major economies such as the US and China, will continue to influence market sentiment, including Bursa Malaysia’s key FBM KLCI index. Any signs of economic weakness or unexpected policy shifts in these countries could have ripple effects on global markets, including Malaysia.

Monetary policy decisions by central banks, especially the US Federal Reserve (Fed), will also be closely watched. Any indications of a change in interest rates or monetary tightening could affect investor risk appetite and market performance.

Moreover, the trajectory of the Covid-19 pandemic and the effectiveness of containment measures will remain crucial. The emergence of new variants or a significant resurgence of infections could disrupt economic activities and dampen market sentiment.

Market sentiment in Malaysia is currently poor, with investors grappling with a range of challenges and uncertainties. While challenges abound, there are potential catalysts that could help lift it out of the doldrums and bring about positive changes.

In a recent report, Bank Islam Malaysia Bhd (BIMB) Research noted that the catalysts in the 2H23 will come from fronts like a favourable US interest rate outlook, Malaysia’s political condition and oil price.

– graphic TMR

Monetary Policy Decisions

BIMB Research expects the market rebound in the 2H23 to be primarily driven by a policy pivot by the US central bank, which may include a potential cut in the Federal Funds Rate (FFR). The research house highlights that the FFR is currently more than 100 basis points (bps) above its neutral rate, indicating that the interest rates are relatively high.

BIMB Research expects the Fed to lower the FFR in response to an expected pullback in US inflation. It explained that this pullback is attributed to a high base effect (compared to a previous period of high inflation) and the lagged impact of cumulative increases in the FFR.

The anticipated moderation in US inflation and the relatively high level of the FFR are seen as factors that could prompt the US central bank to adjust the FFR, which would likely be welcomed by the equity market.

BIMB Research suggests that the US FFR could potentially be cut by as much as 100 bps or even more.

Moving closer to the 4Q23, Kenanga Research anticipates a potential structural shift in liquidity flows and domestic sentiment – TMRpic

Easing Political Uncertainties

The easing of political uncertainties in Malaysia holds a significant importance for domestic sentiment and economic stability.

“The government is working on a number of reforms, many of them long overdue. But don’t expect anything major to be announced until the state elections are over. Restructuring invariably entails short-term pains for long-term gains,” an economist who has been involved in past government economic initiatives told The Malaysian Reserve (TMR).

Hence, the Aug 12 polls will be a major milestone for the current unity government under the leadership of Prime Minister (PM) Datuk Seri Anwar Ibrahim.

The state elections will provide clarity on the political landscape and potentially pave the way for the Anwar administration to focus on medium-term economic plans and policy reforms.

In a recent report, HLIB Research noted that political stability is crucial for market sentiment, adding that the resolution of the state elections could help alleviate uncertainties and provide a more conducive environment for economic reforms and investor confidence.

The research report suggests that the outcome of these elections could shape the direction of Malaysia’s economic policies and attract both domestic and foreign investments. As political uncertainties diminish, businesses and investors may gain more confidence in the government’s ability to implement reforms and drive economic growth.

To recap, the impending six mid-term state elections could push investors to the sideline, given its potential ramifications and reverberating effects. Investors will attempt to measure the depth of support for the unity government, particularly in Opposition-controlled states of Kelantan, Terengganu and Kedah.

In its report, BIMB Research said the outcome will also set the tone for investors’ psyche over the unity government’s ability to continue for a second term.

“A less than encouraging support for the unity government (from the outcome of the state elections) suggests that the reforms initiated by unity government may be stalled, reset or re-dial, another setback for the country. In a nutshell, July/August is an important month for the market as it will determine investors sentiment over the country.

“We are negative on this given the distraction on the government’s focus to rejuvenate the economy following the still strong after-effects of prolonged pandemic (Covid-19). For the sake of stability, state elections should have been held together with the recent general election (GE),” it said.

Indeed, the economist who spoke earlier, concurred. He said: “From the government’s perspective, the state elections are a distraction from the real work on the ground. But it’s one it has to endure.”

US Dollar Trend Expected to Weaken CGS-CIMB Research noted the breakdown of the US Dollar Index (DXY) as another potential catalyst on the horizon that could lead to a shift in sentiment and liquidity flows in the coming months. It said that a breakdown of the DXY below the psychological 100 mark has the potential to impact global markets, including Malaysia.

A weakening US dollar, it said, could provide a boost to emerging markets (EMs) and increase liquidity flows into these economies. This, it said, would benefit Malaysian equities as a stronger inflow of foreign capital could improve market sentiment and potentially drive stock prices higher.

“A weaker US dollar would likely lead to improved risk sentiment and support capital flows into EMs. This could provide a much-needed boost to the Malaysian equity market, particularly for export-oriented sectors,” it said.

Oil Price Movements

Additionally, BIMB Research highlighted the potential impact of oil price movements on the Malaysian market in the 2H23. It suggests that the prospects for the market will be influenced by the expected rebound in oil prices.

BIMB Research noted that there is a negative correlation between the FBM KLCI and oil prices. This means that historically, the FBM KLCI tends to perform better when oil prices decrease and vice versa. The FBM KLCI is the index of top 30 companies on the local stock exchange based on market capitalisation that meets free float liquidity requirements, providing investors an investable and tradable index.

BIMB Research explains that oil prices were negatively affected in the 1H23 due to demand risks. However, it noted that there are expectations for a change in the fate of oil prices in the 2H23, primarily driven by interventions from OPEC+ (the Organisation of the Petroleum Exporting Countries and its allies).

It is mentioned that OPEC+ plans to make a steeper cut in oil output, equivalent to 3.66 million barrels per day (bpd), which is 3.7% of daily global demand. This intervention is expected to support oil prices.

At the same time, BIMB Research said that Saudi Arabia will implement a self-imposed cut of one million bpd in July, further contributing to the support of oil prices. Additionally, the slowdown in US oil inventories to a five-year average in the first quarter of 2023 (1Q23) is seen as another factor driving oil prices.

Overall, BIMB Research suggests that the rebound in oil prices, driven by various factors such as OPEC+ interventions, winter demand, currency fluctuations and geopolitical tensions, will have implications for the Malaysian market in the 2H23.

Global Economic Conditions

Global economic conditions, particularly in the US and China, continue to influence market sentiment. Any signs of economic weakness or unexpected policy shifts in the world’s top two economies could have ripple effects on global markets, including Malaysia.

However, it is important to approach these potential catalysts with caution.

Analysts highlighted that despite for ward valuations falling to two standard deviations below the post-global financial crisis (GFC) mean, poor market sentiment is expected to persist in the near term.

The identified catalysts are anticipated to have a more significant impact in the 4Q23.

“We expect the poor market sentiment to continue for the next few months, despite the attractive valuations. However, moving closer to the 4Q23, we anticipate a potential structural shift in liquidity flows and domestic sentiment,” states a report from Kenanga Research.

While these catalysts offer hope for a potential improvement in market sentiment, it is essential to remain cautious and recognise the inherent risks involved. Global economic trends, geopolitical developments and changes in investor risk appetite can influence market sentiment beyond the identified catalysts.

• This article first appeared in The Malaysian Reserve weekly print edition