AIIMAN | Asset Management

Weekly Market Review

A Brief on Global & Local Markets, Investment Strategy.
Week in Review | 13 November - 17 November 2023

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Global & Regional Equities

US equities surged as softer inflation bolstered bets that the US Federal Reserve (Fed) is done with its aggressive rate hike campaign. The S&P 500 index rose 2.20% as inflation data for the month of October fell below expectations.

The US consumer price index (CPI) increased by 3.20%, down from September's 3.70%, primarily due to lower gasoline prices. Excluding volatile food and energy prices, core CPI rose by 4.00% y-o-y, with softer readings in hotel prices and owners' equivalent rent.

Similarly, US producer prices declined more than anticipated, piling further evidence that inflationary pressures have eased. US producer price index (PPI) dropped 0.50% in October from September, marking the first decline since May.

In politics, US President Joe Biden signed a temporary spending bill, averting a government shutdown. The spending package keeps government funding at current levels for roughly 2 more months while a long-term package is negotiated. However, the move did not surprise markets, given similar scenarios earlier this year.

A softer inflation print sent bond yields tumbling with the US-10 Year Treasury yield closing at 4.45%. Investors’ attention will turn to the release of the Fed’s minutes from its November policy meeting that could offer insights to the path of interest rates.

In Asia, the MSCI Asia ex-Japan climbed 2.70% on the back of a weaker US dollar amidst growing bets that the Fed’s tightening is approaching its end. Taiwan spearheaded gains with its stock exchange weighted index rising by 3.20%, propelled by significant foreign buying amounting to USD 4 billion which is the highest weekly inflows this year. Other notable performers included Indonesia's Jakarta Composite index and Korea's KOSPI, both recording a gain of 2.50%.

Chinese equities started strongly in the earlier part of the week as a widely anticipated meeting between China's President Xi Jinping and US President Joe Biden boosted sentiment. However, the rally sputtered towards the end, presumably due to a lack of any concrete action plans.

According to Bloomberg, Beijing is contemplating a RMB 1 trillion stimulus to support its beleaguered property sector. While this injection, combined with other stimulus measures, could contribute to stabilising the property sector, it might fall short of inducing a complete turnaround. There is still a need for further fiscal measures to spur consumption and demand. This comes as the latest data shows a continued decline in property sales in October.

Shifting to Taiwan, the nation's two primary opposition parties are set to create an alliance for the upcoming election in January 2024. However, talks between the two parties have reached a deadlock as they are unable to reach an agreement on the presidential candidate, leaving the situation in flux for now.

Despite the impasse, the formation of such an alliance holds significance, as it could present a more credible challenge to the ruling party, which currently leads in opinion polls. The two opposition parties are perceived to be more amicable towards China than the current pro-independence ruling party. Consequently, any potential change in government in Taiwan could be viewed as an improvement in relations with China, thereby reducing the geopolitical risk premium in the market.

Meanwhile, earnings season continues in full swing in Asia with Chinese internet companies posting their results. While many reported revenues in line with expectations, they exceeded earnings forecasts due to better margins.

Notably, Alibaba succumbed to significant selling pressure after the tech giant announced that it would no longer spin off and list its cloud computing business. The company cited uncertainties stemming from the US export restrictions on advanced chips. In its earnings call, the management also expressed caution regarding the outlook, noting challenges in consumption recovery.

On portfolio action, we nibbled into China Resources Gas, a listed gas distributor which is seeing earnings recovery and is trading at attractive valuations. While we are maintaining an underweight position in China, we do see opportunities to gradually increase our allocations given the current low positioning. Potential tailwinds include the anticipated weakening of the US dollar, which would favour emerging markets. However, it is important to continue to see pro-growth policies that would help spur a recovery which has stalled post-COVID-reopening.

Updates on Malaysia

On the domestic front, the benchmark KLCI advanced by 1.10% mirroring gains in regional markets. Notably, foreign buying persisted for the second consecutive week in November.

In significant news, the Ministry of Investment, Trade, and Industry (MITI) unveiled plans to enforce a 2-year moratorium on new manufacturing licenses for the iron and steel industry. This development acts as a catalyst for existing steel players with reduced competition and lower supply. We have exposure to this sector through Hiap Tek Bhd.

Glove producer Kossan Bhd reported a profitable quarter, marking a turnaround after 3 consecutive quarters of losses. The results surpassed expectations and followed Hartalega's positive earnings in the preceding week. Both glove makers are seeing improved sales volume which are expected to enhance utilisation rates and offset declines in average selling prices (ASP). Our exposure in this sector ranges from 3% to 8%.

In terms of portfolio action, we added positions in telcos while trimming some plantation and glove names. Conventional funds maintain a cash level of 10%, whereas Shariah-compliant funds hold cash levels ranging from 15% to 25%.

Fixed Income Updates & Positioning

It was another strong week for Asian credits as we saw continued spread compression. Beta compression was a key theme last week as we saw BBB names outperforming on the investment grade (IG) index. This was contributed by China names such as Lenovo, Xiaomi and Meituan Group that saw tightening of about 15 – 20 bps w-o-w. As of 16 November 2023, the J.P. Morgan Asia Credit (JACI) Index saw a positive return of 1.6% in 1-month period.

Zooming into China, there were stimulus talks by the People’s Bank of China (PBOC) as they will be providing 1 trillion RMB in low-cost financing to aid China’s housing market. PBOC have also reached out to a handful of lenders to cap interest rate on interbank funding. In other news, China Huarong AMC will rebrand as “China Citic Financial Asset Management” as they acquired 5.01% of Citic Limited last week. The rebranding announcement indicates their strong connection with Citic Group. China Huarong AMC bonds jumped 3 – 6 points following the news before settling at 2 – 5 points higher.

In Macau, rating agencies have upwardly revised on some Macau gaming companies as Macau gross gaming revenue (GGR) recovered sooner than expected. In the AT1 space, we saw new deals from Barclays and Santander Bank after UBS Bank’s success. In terms of pricing, they both printed sub-10%.

On primary issuances, there were new issuances of USD3.01 billion from the APAC region. The largest contributor to the new issuances was Toyota Group.

On portfolio action, we have participated in Barclay Bank’s new AT1 and extended some duration through long-end treasury. We also took profits from names like Dah Sing Bank.

Back home, we saw the Malaysian Government Securities (MGS) curve remained range bound on the backs of volatile treasury. The MGS yield shifted lower towards the end of the week, declining 3 – 8 bps w-o-w. The benchmark 10-year MGS closed at 3.84% whilst the 30-year MGS closed at 4.30%.

There was a 3-year GII auction last week with an issuance size of RM5 billion that drew weak demand with a bid-to-cover ratio of only 1.5x - the lowest of all 3 - 5 years governments bonds auctions year to date. We believe the low bid-to-cover ratio is due to lesser demand and investors being more cautious as we enter the year-end. The average yield for this auction was 3.62%.

Last week, it was announced that Malaysia’s Q3 gross domestic product (GDP) printed at 3.3% y-o-y compared to Q2’s GDP of 2.9%. On a q-o-q basis, our economy expanded by 2.6% supported by the private consumption that expanded 4.6% y-o-y. Government spending also increased by 5.8% y-o-y due to higher spending in supplies and services. In terms of exports, Malaysia has declined by 12% compared to Q2’s 9% contraction. For 2023, GDP growth is projected to be 4% – 4.3%. The 9-month 2023 real GDP is currently averaged at 3.9%.

Our local fixed income portfolios focused on trading govvies and buying corporate bonds in the secondary market, while we wait for primary issuances of CIMB Islamic, UEM Olive, Plus Bhd and Bank Pembangunan. Duration of our funds are averaging between 5 – 6 years with cash levels between 5% - 14%.

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