Global equity markets remained highly volatile during July amid rapidly changing macroeconomic and geopolitical environment.
A weaker than expected US Consumer Price Index (CPI) reading early in the month, combined with weaker US labour market data, reassured bond investors that the US Federal Reserve (US Fed) will soon begin cutting interest rates. Investors now expect the first US Fed rate cut in September and are currently pricing almost three US rate cuts this year, with around 150 basis points worth of cuts by June 2025.
Overall, the Dow Jones Industrial Average rose 4.4% higher in July, the S&P 500 advanced 1.1%, and the NASDAQ slipped 0.7% as investors rotated out of mega-caps tech names.
In Europe, the Euro STOXX 50 dropped 0.4% month-on-month (m-o-m) in July. Annual inflation rate in the Euro area unexpectedly edged up to 2.6% in July 2024 from 2.5% in June, compared to forecasts it would slow to 2.4%.
The European Central Bank (ECB) decided to keep interest rates unchanged in July 2024 as expected, as current data supports their previous inflation outlook. The main refinancing operations rate remained at 4.25%, the deposit facility rate at 3.75%, and the marginal lending rate at 4.5%. The unemployment rate in the Euro area ticked up to 6.5% in June 2024, from an all-time low of 6.4% in the prior month.
Asian equity markets were mixed in June. The MSCI Asia ex-Japan fell 0.6% m-o-m in July. Taiwan was the worst-performing market primarily on the back of the artificial intelligence (AI)-driven tech rally taking a breather in the last few weeks.
Chinese equity markets also fell last month, due to continued challenges in the real estate sector and the spillover effects on the broader economy. However, Chinese authorities implemented measures to provide liquidity support to the financial system, including cutting the reverse repo rate, a key short-term policy rate, and lowering the benchmark loan prime rate. These efforts aim to stimulate lending and support economic growth amid ongoing market challenges.
Locally, the FBMKLCI, FBM100, FBM Shariah and FBM Small Cap were up by 2.23%, 2.64%, 1.67% and 0.63% m-o-m in July, respectively. The FBMKLCI remained the top performer in the region and Malaysia was the only country to see net foreign inflows in July, albeit marginal.
Sector-wise, construction was the best performer in July, increasing by 14.4% m-o-m amidst positive news flow and contract awards. Property was the second-best performing sector for July, increasing by 4.9% m-o-m with expectations of more datacentre related projects and land sales.
In Malaysia, the overnight policy rate remained stable at 3% as expected. This was followed by the 2Q24 advanced estimates for GDP growth coming in at 5.8%, which was above market expectations with the support of both domestic and export-driven factors. This was also in line with the industrial production index.
Higher tourism arrivals, better crude palm oil production and the progress in the development of mega projects further supported the GDP growth. The Malaysian ringgit also showed some signs of recovery in the month-end after efforts put in by the central bank to persuade government linked companies and other corporates to repatriate and convert foreign earnings. Expectations of the US Fed rate cut could further fuel the strength of the ringgit.
Equity market outlook & fund strategy
In commodities, Brent crude oil prices declined by 6.6% m-o-m to US$80.7 per barrel as the market weighed the impact of weaker demand from China against supply issues arising from tensions in the Middle East. Meanwhile, CPO declined by 0.2% to RM3,908 per ton despite strong July export as a stronger ringgit weighed down the price.
Investors’ near-term focus will be on economic data in the US and the US Fed’s guidance for indications of the timing of rate cuts. The US Fed could start cutting rates in the second half of 2024, with the market expecting the first cut to occur in September 2024. Markets are keenly focused on the growth outlook in the US as debates form on a potential recession. Nonetheless, should growth show signs of weakening, aggressive cuts by the US Fed could support growth and liquidity.
Meanwhile, China’s additional fiscal stimulus has been supportive, but further measures are necessary to revive the property market and restore market confidence.
We remain positive on the Malaysian equity market this year as we expect resilient GDP growth of 4%-5%, improving momentum of policy execution on construction and infrastructure projects, rising foreign direct investment, while valuation and foreign shareholding remains low.
Given the positive outlook, we are positive on sectors such as financials, construction, property, new energy and utilities. Additionally, we continue to like the technology sector as the key beneficiary of long-term growth trends such as AI, electric vehicles and supply chain relocation.
Disclaimer: The information contained herein does not constitute any investment advice. Past performance is not indicative of future performance.
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