Subdued fundamentals masked by liquidity flush
KUCHING: It has been an interesting period of flushed liquidity in Malaysia, observed the research team at Hong Leong Investment Bank Bhd ( HLIB Research), in spite of subdued fundamentals on several fronts.
This comes as new daily Covid19 cases are charting new highs and spreading at a faster rate, US-China relations are souring and risking adherence to its Phase 1 trade deal, and fluid domestic politics with the ruling PN coalition having an estimated slim majority of 4 seats in Parliament.
“Despite these, the KLCI has staged an unprecedented rebound to recoup all prior “Covid-19 losses”, spearheaded by rubber glove tailwinds and a liquidity flush both domestic and external,” it said in a note yesterday.
“We previously expected some downward normalisation in retail participation postmovement control order (MCO) as more return to work and gambling avenues reopen.
“However this doesn’t seem to be the case as average retail participation in July of 38.8 per cent is higher than during the MCO period and retailers net bought RM2.82 billion from June to July 24, mirroring the levels seen in the MCO.
Year to date, HLIB Research saw that average retail participation reached a decade high while net buys of RM8.05 billion has more than tripled 2019’s full year sum of RM2.4 billion.
“However, we are mindful that some of this “retail liquidity” could diminish once the loan moratorium ends on September 30; take up rate by households for the moratorium now stands at 85 per cent.”
Globally, HLIB Research believed Malaysia could have benefitted from the US.
Since the outbreak of Covid19, the Federal Reserve’s balance sheet has expanded by US$2.9 trillion in the past four months to US$7.1 trillion.
For perspective, the same magnitude of increase took more than five years to achieve during the initial Global Financial Crisis days.
“While there is no indication of what this “unlimited quantitative easing arsenal” will amount to, economists surveyed by the Wall Street Journal projected the Fed’s balance sheet to end-2020 at US$8.7 trillion, implying another US$1.6 trillion to be pumped in.
“Part of the liquidity flush from the Fed’s unlimited quantitative easing is speculated to find a home in equities, first in the US and developed markets before subsequently spilling over to emerging markets, Malaysia included,” HLIB Research said.
With the Fed’s balance sheet expansion happening “so fast, so soon” this time around, the research saw chances are that this “situational spill over” could happen again.
“Furthermore, foreigners already underweight on Malaysia being net sellers in the last six or seven years, and shareholding of 21.4 per cent as of end-June is a decade low.
“Given such, the base now appears much more palatable to envision their re-entry,” it added.
“With Americans heading to the polls this November, it is possible that an “election rally” could ensue for the US market.
“Should historical probability play in favour of positive returns this time around too, this spells further upside for US equities.
“In turn, we may see some positive sentiment spill over to the Malaysian market.”