Lacklustre Week Ahead of CNY Holidays

The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) managed to bounce back from its recent slump early last week as local stocks were lifted after China’s fourth-quarter GDP growth came in at 5.4%, beating market expectations. Market sentiment was further improved by optimism that the new U.S. President Donald Trump may adopt a more measured tariff policy following reports of a positive conversation between him and Chinese leader Xi Jinping while he also refrained from immediately imposing on Chinese imports as previously promised. Blue chips then took a dip by the latter part of last week, led by profit-taking among technology and energy heavyweights, after the US President announced a USD500 billion AI investment project, which could dampen prospects for local data centre projects. From a positive perspective, the rising needs for data storage and analysis due to the proliferation of disruptive technologies will increase demand for cost efficient data centres in the future. The new investments and higher base of AI projects in the US will allow Tier 1 countries to have greater investments in Tier 2 nations based on the 7% cap on AI computational power capacity per country and the 25% aggregate cap in all Tier 2 countries.

Week-on-week, the FBM KLCI added 7.01 points, or 0.45 percent to 1,573.73, as gains on Sunway Bhd (+35sen), Press Metal Aluminium Holdings (+17sen), SD Guthrie (+13sen), Maybank (+26sen), and MISC (+12sen) outweighed losses on YTL Power (-29sen) and YTL Corp (-7sen). Average daily traded volume last week declined to 3.12 billion shares versus 3.29 billion shares the previous week, while average daily traded value also fell to RM2.62 billion, against the RM2.92 billion average the previous week.

The local equity market sentiment is expected to remain weak due to the shortened trading this week caused by the Chinese New Year (CNY) holidays. Many investors may adopt a cautious approach, leading to lower trading volumes and limited market movements. Recall that in our weekly strategy report two weeks ago, we highlighted that the local equity market normally succumbs to profit-taking pressure in the pre-CNY period before rebounding in the post-CNY period. Historical records from 1991 show that the probability of profit-taking in the last two weeks prior to CNY is 55.9%, with an average correction of 1.9%. Meanwhile, the probability of a rally in the two-week period after CNY is 67.6%, rising to 73.5% and 70.6% after one month and three months with average gains of 3.9%, 4.2%, and 7.0%, respectively.

The strong performance post-CNY could be driven by the return of retail investors and stronger buying interest from local institutions, aided by traction in corporate earnings growth as the fourth-quarter results reporting season concludes in February. It could also be due to investors positioning themselves to qualify for final dividends. Additionally, several other key factors could contribute to this potential recovery. Investors will be closely watching the outcomes of the US Federal Reserve meeting on 29 February. Any positive guidance or indications of favourable monetary policy could boost market confidence globally, including in Malaysia.

Based on the FedWatch Tool, the probability of the Federal Reserve maintaining its target rate between 4.25% and 4.50% in this meeting is very high at 97.9%, with chances for a 25 basis points cut standing at only 2.1%. As the probability of an interest rate cut rises above 50% only in the June meeting (69.6%), any indication from the central bank that it could happen sooner due to a weakening economic outlook and falling inflation could create excitement. The Fed should be privy to the advanced US GDP data for 4Q24, which will be released a day later, and the December core PCE data that will provide insights into inflation trends in the US. Lower-than-expected inflation could ease concerns about prolonged delays in interest rate cuts and increase the possibility of the central bank succumbing to pressure from the new US president for looser monetary policy, supporting market sentiment.

In China, industrial profit data for December is expected to show improvement, indicating a recovery in China’s industrial sector, which is a positive sign for global economic stability. Its Purchasing Managers’ Index (PMI) data for January 2025 is expected to remain resilient, with both the manufacturing and non-manufacturing PMI sustaining the levels of 50.1 and 52.2 seen in December. Investors could anticipate greater fiscal interventions from the government to boost domestic consumption in the March Politburo meeting. Additionally, the consumption data during the CNY celebrations and holidays could provide vital information on the scope and depth of the upcoming measures.

Overall, while the Malaysian stock market may start the week on a subdued note due to the Chinese New Year holidays, the potential for recovery post-holidays is high, driven by positive economic indicators from the US and China. Investors should stay informed and be prepared for potential market movements as these key data points are released.

Source: TA Research - 27 Jan 2025