US equities gained ground bolstered by a softer inflation print and dovish comments from US Federal Reserve (Fed) members. The S&P 500 index edged up by 0.80% last week. Notably, the small-cap space outperformed, rising by 3.00% as a decline in bond yields helped reverse earlier losses.
The US core personal consumption expenditures (PCE) price index, which is the Fed’s preferred inflation gauge came in line with expectations, rising 0.20% for the month and 3.50% on a y-o-y basis. While it hasn't yet reached the Fed's 2% inflation target, there is an overall downward trend.
This was reflected in a shift of Fed members taking a more dovish stance, as various members expressed concerns on the impact of rising rates to consumers and corporates. Similarly, Fed Chair Jerome Powell struck a dovish tone at a recent conference, where he acknowledged that tighter US monetary policy was slowing down the economy.
While he stated that it is premature to discuss rate cuts, he adds that current rates are “well into restrictive territory” and that the balance of risks between overtightening or hiking enough to control inflation appearing “more balanced”.
The dovish remarks coincided with the US reporting a contraction in manufacturing, as the ISM manufacturing Purchasing Managers' Index (PMI) remained unchanged at 46.79 last month. This marks the 13th consecutive month that the PMI has stayed below 50.
Treasury yields declined amidst rising expectations that the Fed has approached the end of its rate hike cycle. The US 10-Year Treasury yield fell 20 bps to close at 4.20% last week.
US equities gained ground bolstered by a softer inflation print and dovish comments from US Federal Reserve (Fed) members. The S&P 500 index edged up by 0.80% last week. Notably, the small-cap space outperformed, rising by 3.00% as a decline in bond yields helped reverse earlier losses.
In Asia, the broader MSCI Asia ex-Japan index experienced a marginal decline of -0.30%, revealing divergent performances across the region. Hong Kong's Hang Seng index took a substantial hit, plummeting by 4.20% on the back of a disappointing earnings report card. On the flip side, Taiwan's Stock Exchange Weighted index and India's S&P BSE Sensex stayed resilient, rising by 0.90% and 2.30%, respectively.
Tech giants Alibaba and Meituan’s guidance fell short of expectations. This led to a cut in earnings forecasts, as both companies flagged concerns of a slower recovery in the coming quarters due to macro headwinds.
Additionally, China's factory activity witnessed a second consecutive month of contraction as reflected in the official manufacturing PMI dropping to 49.4 in November from 49.5 last month. The weakness extends to the monthly property sales data which remains weak. This could signal to policymakers of the need for more muscular policy support to shore up economic growth.
On portfolio action, we initiated a new position in US payment technology provider, FLEETCOR Inc. which has enjoyed steady earnings growth of up to 10%. Cash levels range between 5%-6%.
On the local front, the benchmark KLCI closed flat at 0.20% as investors took cues from the 3Q’2023 results season which concluded last week. Overall, earnings performance aligned closely with estimates. Notably, domestic-driven sectors such as banks, consumers, property, and construction were seen outperforming. On the flipside, sectors such as technology and manufacturing which are more export-oriented delivered softer results.
The latest semi-annual review of the KLCI resulted in changes to its composition. YTL Power International Bhd and its parent company YTL Corp Bhd are set to be included in the index, taking the places of Dialog Group Bhd and Westports Holdings Bhd. These adjustments are slated to become effective on December 18.
In corporate headlines, Axiata concluded the sale of its 80% stake in Ncell Axiata Bhd, effectively exiting the Nepal market. In our view, this is a strategic move towards asset monetisation and helps remove a key overhang for the stock.
We continue to add to our existing position in Axiata as a deep-value pick for our local portfolios. Additionally, we top-sliced our exposure in gloves to take some profit. Cash levels remain in the range of 10% to 20%.
Asian credits were stable last week for both the investment grade (IG) and high yield (HY) space. There was some profit taking action towards the end of the week after multiple weeks of rally. IG credit spreads ended 2 bps higher at 109 bps whilst HY saw spreads widening to 818 bps.
Emerging market (EM) bonds saw outflows of USD 317 million last week compared to an inflow of USD 193 million the week before.
In the Chinese property space, things are still looking grim due to negative property headlines and data showing weak property sales. Bond prices were as much as 6 points weaker. Some negative headlines include November property sales data down 3% m-o-m and 30% y-o-y and Powerlong defaulting on one of its coupon payments for its USD bond due 2025. We also saw China Vanke being downgraded 2 notches by Moody’s to Baa3 and its offshore bonds are now HY at Ba1/Negative. As a result, China Vanke's curve saw more volatility with bond prices down as much as 8 points.
Elsewhere, there were some debt restructuring headlines with Shimao coming out with a new restructuring proposal for its offshore debts, looking for a haircut of about 50%. This was good news compared to market expectations of a haircut of about 70% - 80%. Also, China Evergrande will go to court on Monday, 4 December 2023, for its last adjournment on its debt restructuring.
In Hong Kong, New World Development announced a bond tender last week. The tender offer is capped at USD 600 million. Both perpetual and bullet bonds gradually trended higher after the news but retreated back to pre-tender announcement prices towards end of the week.
On portfolio action, we took profit on newly issued bonds like the Barclays 9.625% AT1, Fukoku 6.8% AT1.
Back home, the local bond market was supported by local demands with some sporadic foreign balancing inflow towards the month-end. On a w-o-w basis, bond yields declined by 3 - 4 bps. The 10-year Malaysian Government Securities (MGS) closed at 3.82% whilst the 30-year MGS closed at 4.3%.
There was a 7-year GII auction last week that saw a strong bid-to-cover ratio of 3.3x with an auction size of RM5 billion. The strong buying demand is likely due to the reinvestment of the recent RM11.5 billion GII maturity on 30 November 2023. The yield was also relatively flat compared to the 10-year GII.
On corporate bonds, we continue to see buying demands, especially on the long-dated AAA names. The yield for the long-dated AAA names continues to decline by 3 - 5 bps with slower buying momentum comparing to the week before.
On portfolio action, we continue to trade both government and corporate bond in the secondary market. We are strategically switching position whilst continue to take profit. On average, duration for our local FI funds are between 5 - 6 years with cash levels at 5% - 10%.
