Quarterly Market Outlook
Higher inflation in the US and globally, fear of quantitative easing, a resurgence of the Covid-19 virus and the slow pace of vaccination are key factors that will cause higher volatility in the equity market. They are likely to dampen market sentiment, especially concerns surrounding the US inflation rate.
Inflation moves higher
In April, US inflation increased by the most — in nearly 12 years — owing to strong demand amid a reopening of its economy and supply constraints. It has added fuel to financial market fears of a prolonged period of higher inflation.
Market players are concerned that US inflation could stay for longer, as companies are raising wages to compete for scarce workers. It may lead to a bigger wage rise and higher inflation, longer than the US Federal Reserve predicts. The Fed could be forced to raise interest rates sooner than expected.
In May, higher inflation led to a decline in the US Conference Board’s Consumer Confidence Index and University of Michigan’s Consumer Sentiment Index. US consumers were less upbeat on their spending power. They were worried about their disposable income in the future, which might lead to lower consumer spending.
We believe the US Treasury 10-year yield will rise further as the economy improves. But the Fed may intervene if yield spikes significantly within a short period. It may derail the recovery in the economy, and market players do not like such a surprise. Another concern is that the Fed might be thinking of scaling back its asset purchases if high inflation persists. We believe the taper tantrum that happened in late 2016, when the yield on the US 10-year government bond spiked from 1.55% to 2.60%, will not repeat itself this year.
On the local front
In Malaysia, the government imposed the Full Movement Control Order (FMCO) from June 1 to 14, owing to the persistently high number of Covid-19 cases.
During that period, Covid-19 cases exceeded 7,000 daily, straining the healthcare system to breaking point. Tighter standard operating procedures were imposed nationwide, and only certain essential services were allowed to operate.
Most economists have not revised down the country’s 2021 forecast GDP growth, following the implementation of the FMCO. The extent of the downward revision depends on the duration of the lockdown.
However, the local economy will not be as bad as it was in the second quarter of last year, when GDP shrank 17.1%.
Why? The government will be allowing private vaccination centres to administer a total of 40,000 doses daily. It aims to raise daily vaccinations to 150,000 doses by end-June and 300,000 by August. The virus is likely to be contained with the vaccination programme underway. Coupled with strong export performance, the slowdown in GDP is likely to be buffered.
In addition, the government announced a RM40 billion economic stimulus package (estimated at 2.8% of GDP) called Pemerkasa Plus in May, just ahead of the FMCO.
The stimulus package includes a direct fiscal injection of around RM5 billion (0.3% of GDP), consisting of RM1 billion for public health; RM2.1 billion in cash handouts to lower-income groups; RM1.5 billion for a one-month extension of the Wage Subsidy Programme; RM500 million for a one-of special grant to micro, small and medium enterprises; and RM68 million for a one-off RM500 special assistance to tour guides as well as bus, taxi, rental car and e-hailing drivers.
The government also extended the stamp duty exemption for property purchases under the Home Ownership Campaign and sales tax exemption for passenger car purchases until year-end.
At the time of writing, it was unclear whether Pemerkasa Plus’ RM5 billion direct fiscal injection would add to this year’s budget deficit. It is also uncertain whether it will be financed by reallocating spending or with additional revenues from oil-related revenues in view of the rise in crude oil price.
Local economy in better shape than last year
During MCO 1.0, the country suffered daily losses worth a total of RM2.4 billion of GDP while corporate earnings were downgraded by 11.3% from March 18 to June 2, 2020.
Since the start of this year, however, corporate earnings estimates suffered no downward revisions after the implementation of MCO 3.0. The KLCI also did not react that negatively to the announcement of the FMCO.
As at June 4, the KLCI had fallen about 1% since the announcement of the FMCO. Last year, the index was down 9.3% on March 19, a few days after MCO 1.0 was announced. In addition, corporate earnings remain resilient so far.
We believe the market is assessing the possibility of reopening the economy if the vaccination programme gains momentum. We are also positive on the equity market in the longer term on the back of economic recovery towards end 3Q2021 at the earliest, if the vaccination programme gains further traction.
Invest with RHB Premier to unlock wealth opportunities.
Join RHB Premier today.
Get in touch with RHB Premier today.
This publication has been prepared by RHB Bank Berhad and is solely for your information only. It may not be copied, published, circulated, reproduced or distributed in whole or part to any person without the prior written consent of RHB Bank Berhad. In preparing this article, RHB Bank Berhad has relied upon and assumed the accuracy and completeness of all information available from public references and articles or which was otherwise reviewed by RHB Bank Berhad. Accordingly, whilst we have taken all reasonable care to ensure that the information contained in this article is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness or fairness of such opinions and make no representation or warranty (whether expressed or implied) and accept no responsibility or liability for its accuracy or completeness. You should not act on the information contained in this article without first independently verifying its contents.
Any opinion, historical account, personal profile, estimate or data contained in this article is based on information available as of the date of this article and are subject to change without notice. It does not constitute any advice, offer or solicitation by RHB Bank Berhad. This document and its contents are not intended to constitute an offer for sale and/or invitation to subscribe for or purchase or otherwise acquire any of the instruments referred to herein.
Disclaimer for Video and Podcast by RHB Asset Management:The podcast provided herein is solely for information purposes only. It does not take into account the specific investment objectives, financial situations or particular needs of any particular person.
This podcast does not constitute an offer, solicitation or recommendation to buy or sell or subscribe for any security or financial instrument or to enter into any transaction or to participate in any particular trading or investment strategy. Information contained in the podcast should not be relied upon when making investment decisions. You should seek independent legal or tax advice before making any investment decisions. Investments are subject to investment risks, including the possible loss of the principal amount invested. Value of the investments and the income, if any, may fall or rise.
No representation or warranty whatsoever (including without limitation any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein and it should not be relied upon as such. The information provided herein may contain projections or other forward-looking statements regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance.
Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same. RHBAM does not guarantee that all risks associated to the transactions mentioned herein have been identified, nor does it provide advice as to whether you should enter into any such transaction. The contents hereof may not be reproduced or disseminated in whole or in part without RHBAM’s written consent.
This podcast has not been reviewed by the Securities Commission Malaysia. You should not act on the information contained in this podcast without first independently verifying its contents.
Disclaimer for Video and Podcast by Economics and Market Strategy:This report is prepared for information purposes only by the Economics and Market Strategy division within RHB Bank Berhad and/or its subsidiaries related companies and affiliates, as applicable (“RHB”). All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation or warranty, express or implied, as to its accuracy, completeness or correctness.
Neither this report, nor any opinion expressed herein, should be construed as an offer to sell or a solicitation of an offer to acquire any securities or financial instruments mentioned herein. RHB (including its officers, directors, associates, connected parties, and/or employees) accepts no liability whatsoever for any direct or consequential loss arising from the use of this report or its contents. This report may not be reproduced, distributed or published by any recipient for any purpose without prior consent of RHB and RHB (including its officers, directors, associates, connected parties, and/or employees) accepts no liability whatsoever for the actions of third parties in this respect. Recipients are reminded that the financial circumstances surrounding any company or any market covered in the reports may change since the time of their publication. The contents of this report are also subject to change without any notification.
This report does not purport to be comprehensive or to contain all the information that a prospective investor may need in order to make an investment decision. The recipient of this report is making its own independent assessment and decisions regarding any securities or financial instruments referenced herein. Any investment discussed or recommended in this report may be unsuitable for an investor depending on the investor’s specific investment objectives and financial position. The material in this report is general information intended for recipients who understand the risks of investing in financial instruments. This report does not take into account whether an investment or course of action and any associated risks are suitable for the recipient. Any recommendations contained in this report must therefore not be relied upon as investment advice based on the recipient's personal circumstances. Investors should make their own independent evaluation of the information contained herein, consider their own investment objective, financial situation and particular needs and seek their own financial, business, legal, tax and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report.
RHB (including its respective directors, associates, connected parties and/or employees) may own or have positions in securities or financial instruments of the company(ies) covered in this research report or any securities or financial instruments related thereto, and may from time to time add to, or dispose off, or may be materially interested in any such securities or financial instruments. Further, RHB does and seeks to do business with the company(ies) covered in this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities or financial instruments of such company(ies), may sell them or buy them from customers on a principal basis and may also perform or seek to perform significant banking, advisory or underwriting services for or relating to such company(ies), as well as solicit such banking, advisory or other services from any entity mentioned in this research report.
RHB (including its respective directors, associates, connected parties and/or employees) do not accept any liability, be it directly, indirectly or consequential losses, loss of profits or damages that may arise from any reliance based on this report or further communication given in relation to this report, including where such losses, loss of profits or damages are alleged to have arisen due to the contents of such report or communication being perceived as defamatory in nature.
This podcast has not been reviewed by the Securities Commission (SC) and/or Bank Negara Malaysia (BNM).
RHB Bank Berhad 196501000373 (6171-M)
