Weekly Market Review - Insights | AHAM Asset Management Berhad

A BRIEF ON GLOBAL & LOCAL MARKETS, INVESTMENT STRATEGY.
WEEK IN REVIEW | 15 – 19 MAY 2023

Global Equities Mixed as Debt Ceiling Talks Resume
US equities marched higher on the back of increased optimism that US lawmakers would be able to resolve its debt ceiling standoff. The S&P 500 rose 1.60% as US President Joe Biden and congressional Republican Kevin McCarthy are set to resume talks this week and hopefully reach a consensus to avoid a default.

According to Reuters, Biden met for about an hour with McCarthy, Senate Republican leader Mitch McConnell and House Democratic leader Hakeem Jeffries after their aides met over the weekend to try to strike a deal.

Republicans have refused to vote to lift the debt ceiling past its USD 31.3 trillion limit unless the Democrats agree to spending cuts in the federal budget. However, McConnell reportedly said after the meeting, "We know we're not going to default."

Hawkish cues from US Federal Reserve (Fed) officials propped-up US Treasury yields last week with the benchmark 10-Year closing at 3.67%. Top Fed policy members including Lorie Logan and Philip Jefferson said in separate comments that US inflation does not appear to be cooling fast enough yet to warrant a pause in interest rates.

However in a contrasting remark, Fed Chair Jerome Powell signalled that he was inclined to pause interest rate increases when it meets at its policy meeting next month.

The central bank would have to consider a raft of economic data that are pointing to resilience in the US economy. US retail sales in April excluding auto-related figures increased 0.4% which beat expectations. Industrial production also rebounded strongly in April exceeding forecasts.

In Asia, the broader MSCI Asia ex-Japan was barely unchanged at 0.60% as the latest economic data from China disappoints. Retail sales rose by 18.4% which was lower than economists’ forecast a surge of 21%. Industrial production for April rose by 5.6% y-o-y which came below expectations.

China equities have largely stayed flat this year as tailwinds from its post-COVID reopening begin to dwindle. Despite a surge in travel bookings during the holiday period, the average spending per person has largely remained weak.

This weakness in consumer sentiment was apparent in the latest labour data showing youth unemployment surging to 20.4%. Without job security, there are increased concerns that consumption recovery could taper off as more citizens hold off from spending on big ticket items. Tech titan’s Alibaba latest quarterly results similarly showed e-commerce sales staying tepid.

On the flipside, Korea and Taiwan staged a strong performance last week buoyed by increased confidence that the tech sector is bottoming out with major players seen cutting back on supply. The KOSPI index jumped 2.50%, while Taiwan’s Stock Exchange vaulted 4.30%.

On portfolio positioning, we nibbled into select semiconductor names to build exposure. We have also toned down on our positivity in China until there is clearer certainty on its economic trajectory or major stimulus announcements to spur consumption growth.
Updates on Malaysia
Closer to home, the local market stayed listless with the benchmark KLCI ending the week flat at 0.40%. A lack of any clear catalysts coupled with looming state elections are causing investors to take a wait-and-see approach before deploying.

Last week, saw the return of DXN Holdings Bhd on the Main Market of Bursa. The company which is involved in the sales of health-oriented and wellness consumer product was delisted in December 2011 after being privatised. The company closed lower than its IPO price on its maiden trading day, as it settled at 66.5 sen compared with the IPO price of 70 sen according to The Edge.

As results season approaches, investors will likely shift their attention to corporate earnings that could provide direction in markets.

There were no major portfolio actions last week for our domestic portfolios.
Fixed Income Updates & Positioning
It was another resilient week for spreads on investment grade (IG) bonds, although cash prices were down with United States Treasury (UST) selling off across the curve. As for high yield (HY), the space remained on a soft footing. In terms of flows, outflows continued from emerging market (EM) hard currency bond funds. But this was partially offset by another week of EM local currency fund inflows.

The China property space saw another painful week with most of the bonds down week-on-week. Zooming into CIFI Holding’s upfront payment in relation to its onshore bond extension proposal, the company announced that it plans to add cash payment of 3% of principal instead of its initial proposal of 2%.

To note, investors have exercised their put option for repayment this month. Separately, CIFI Holdings’ auditor, Deloitte resigns over disagreement on independent probe recommendation into certain transactions and the group’s compliance and was replaced by Prism.

On another note, KWG Group is reported to be selling its Shanghai assets for about RMB 750million to Ping An to shore up liquidity. KWG said it hasn’t made a USD 119million amortization payment on Jan 2024 notes due 14 May.

However, it has not received any acceleration notice from relevant creditors; KWG is searching for a financial adviser to explore feasible solutions, and has engaged Sidley Austin as its legal adviser.

In other news, it was reported that China may transfer the stakes of the three national Asset Management Companies (AMCs) apart from Huarong to Central Huijin, in a move to separate the government’s roles as a regulator and shareholder and improve its oversight over such entities.

In terms of portfolio action, we bought some corporate perps and bank sub-debt papers. On the flipside, we trimmed some property bonds.

Malaysian bond yields closed the week on a bear steepening manner with yields higher by 4 -14bps. The 10-year Malaysian Government Securities (MGS) closed the week 13bps higher at 3.76% and the 30-year MGS 9bps higher at 4.15%. There was also the 7-year MGS auction which saw strong bid-to-cover ratio of 2.2x closing at an average yield of 3.60%.

During the week, the primary corporate bond market was active with notable participation from Digi, RHB and SME Bank. We participated in the primary auction for Digi which saw a very strong bid-to-cover ratio of 6x.

For the week, there will be a 20-year Government Investment Issue (GII) auction on Tuesday with a size of around RM 5.5billion. Out of this figure, RM2.5 billion are from private placements. Upcoming issuances in the pipeline is expected to be heavy on government guaranteed (GG) issuances and corporates looking to tap the market. Among GG names are PASB, Danainfra & MRL and corporates Johor Corp, HLBB subdebt, Sarawak Energy Bhd.

On the data front, trade surplus was below market consensus estimates as it narrowed to RM12.8 billion from March’s RM26.7 billion with exports registering a steeper 17.4% fall in April, marking its biggest decline since May 2020. Imports also saw a bigger than expected decline of 11.1%, as slower external demand and moderating domestic demand took a toll on imports of intermediate and consumption goods.

While we took cognizance of the shorter working month in April in observation of Hari Raya festivities, the bigger than expected month-on-month contraction of 18.7% for exports and 10.1% for imports, offered tell-tale signs of a faster than expected softening in growth outlook going into 2Q and beyond.

On portfolio action, we have been taking profit on rates and raising some cash to participate in the upcoming primary issuance pipeline.

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