2QCY22 In Brief: Negative Sentiments With Fears Of A U.S. Recession

The heightened recession fear in the US had led to a net outflow of -RM104.8m by foreign investors from our market in 2QCY22 (as at 27th June 2022).

2QCY22 In Brief: Negative Sentiments With Fears Of A U.S. Recession

Global equity indices ended 1HCY22 on a negative note as sentiments turned due to heightened fears of a US recession. Our expectation is that the US economy will skirt an outright recession, albeit with a high likelihood of a technical recession, says MIDF Research.

The heightened recession fear in the US had led to a net outflow of -RM104.8m by foreign investors from our market in 2QCY22 (as at 27th June 2022).

"Nevertheless, we should note that Malaysia cumulative fund flow still remains positive and above the USD1b mark (RM6.46b)."

No Change In Economic Outlook

The analyst firm says for 2HCY22, it opines domestic economic activities will continue to expand steadily particularly driven by higher consumer spending and business expenditure while external trade sector is forecasted to grow at solid pace underpin by elevated commodity prices and expansionary regional demand.

"We maintain our forecast for Malaysia’s GDP growth at +6% for 2022.

"We raise our average CPI forecast to +2.8% for 2022 given the environment of elevated global commodity prices, where inflationary pressure in Malaysia is affected via higher food inflation," it says.

Banking system Is Still Well-Capitalized To Aid In Economic Revival
According to the central bank, the little increase in capital ratios in May 2022 was caused by price increases on financial instruments that were readily available for purchase at the time as bond yields briefly decreased.

With the rising core inflation trend and stronger-than-expected domestic demand, we believe BNM will raise its OPR by +50bps in 2HCY22.

It also expects ringgit to appreciate towards RM4.25 by end-2022.

Stocks: Sentiments

FBM KLCI 2022 TARGET REVISED TO 1,600

"Amid the backdrop of the mainly external headwinds, our baseline scenarios are such that:

(i) the aggressive monetary policy tightening by the US Fed would not derail Malaysia’s macro (as well as corporate earnings) recovery but may prove detriment to the valuation of risk assets,

(ii) the ongoing Russia-Ukraine war to remain confined within the territory of Ukraine with manageable economic impact to the rest of the world,

(iii) the authorities in China would continue to be pro-active in handling its economic situation and shall pull out all the monetary and fiscal stops to avoid a broader fallout thus limiting the risk of cross-border contagion,

(iv) general election, if called, may not result in negative price action post-election, and (v) Covid-19 is a diminishing threat to the society and economy.

With the economy and corporate earnings growth expectation remains intact, it may seem a bit perplexing that Malaysia’s (and ASEAN peers) equities market continue to be sluggish. We believe that it boils down to valuation.

"Going forward, we expect the local equity market valuation to crawl higher from current levels in line the expectation of better earnings next year.

"However, it would remain rather depressed at below normal historical range due to (i) negative effect of US Fed aggressive tightening on world’s financial liquidity, and (ii) higher risk attached to earnings forecasts.

"Therefore, we cut our FBM KLCI end-2022 target to 1,600 points (from 1,680 points) or PER22 of 15.5x," says MIDF.