Market Commentary February 2023

5 min read     I     Date: 27 February 2023

Global Outlook

The global capital markets rallied in January 2023  with the Asia-Pacific (APAC) equity markets doing particularly well. The stock markets in the H-Share index (a commonly used benchmark for the performance of the Chinese companies listed in Hong Kong), Korea, Taiwan, and Europe’s  STOXX 600 index all went up by 10.7%, 8.4%, 8.0% & 6.7%. respectively.1

However, the stock markets in India, Malaysia, and Indonesia went down by 2.1%, 2.0%, and 0.4% respectively. The prices of bonds went up in January 2023 because the  U.S. Federal Reserve (Fed) didn't increase its interest rate by too much. The indicators that show how much the bond prices went up (or down) rose from 3.2% to 3.3%.1

On the monetary policy front, the Fed and European Central Bank (ECB) reiterated its resolve to bring inflation under control.  The Fed increased its Fed Fund rate by 0.25% to 4.75% on 1 February 2023. This increase was smaller than previous months, to which the capital markets reacted positively.2 Since June 2022, the Fed has been reducing its balance sheet at a rate of USD47.5 billion per month, and this rate increased to USD95 billion in September 2022.2

We have a slight preference for Asian equities over bonds due to Asian equities being under-owned, inexpensive, and having realistic earnings estimates.3 In addition, China’s reopening and pivot to friendlier policies is another key driver.4 Within bonds we prefer local and regional to global developed market fixed income.  

We prefer equity markets in developed economies to their fixed income.

General outlook of the two capital markets: Fixed Income & Equity 
 

Region: Developed economies

    Fixed income

  1. Our view – Neutral
  2. Developed Markets economic growth continues to weaken as reflected by weaker manufacturing PMI (Purchasing Managers' Index). United States (U.S.) job openings however remained resilient.5
  3. The Fed raised interest rate to 4.75%-5.00% with a smaller 25 bps hike. The terminal rate is forecasted at the 5.25-5.50% range.6

      Equity

  1. Our view – positive. 
  2. Developed Markets economic growth continues to weaken as reflected by weaker manufacturing PMI (Purchasing Managers' Index). U.S. job openings however remained resilient.5
  3. We are now overweight on the U.S. including holdings in commodities. European Union (E.U.) remains overweight as their economy did better than expected. We remain neutral on Japan. 
          

Region: Regional (Asia-Pacific ex-Japan)

    
      Fixed income

  1. Our view – neutral.
  2. Pockets of opportunities in local Asian currencies and Chinese credits as yields remain relatively attractive.7
  3. We expect investment grade Asian bonds to provide a gross yield of 5.00% to 5.75% in 2023.7

       Equity

  1. Our view – positive.
  2. We added exposure to cheap valuation and China’s accelerated reopening and stimulus policy.4 
  3. We continue to focus on quality companies with earnings visibility, robust balance sheet, market share gainers and with pricing power.
     

Region: China

      
      Fixed income

  1. Our view – neutral.
  2. Net supply of bond in December 2022 increased by RMB541 billion from a drop of RMB203 billion the month before.8  
  3. The default rate in December 2022 eased to 0.28% from 0.29% in November 2022.8     

       Equity

  1. Our view – positive.
  2. China’s new leaders post the Chinese Communist Party (CCP) congress meeting & Central Economic Work Conference (CEWC) reiterated their stance to strengthen the economy coupled with accelerated reopening and greater support for the property sector.9
  3. The manufacturing PMI for January 2023 increased to 50.1 from 47.0 previously, while the Services PMI increased to 54.4 from 41.6. The stronger data highlighted the impact of the economic reopening.10

Region: Domestic (Malaysia)

       
       Fixed income

  1. Our view – neutral.
  2. Local markets are observing closely the upcoming re-tabling of Budget 2023. Our view is that the main catalyst for the bond market would be the updated projected deficit figure.
  3. Portfolio duration is maintained at medium. The move is to take advantage of potential yield falling in anticipation of stronger market support.
  4. We still prefer credits over government bonds.

       Equity

  1. Our view – positive.
  2. We continue to focus on companies with firm fundamentals, strong cash flows and defensive.
  3. When it comes to the reopening of China's economy, we prefer to invest in stocks related to tourism and selected commodities.

Our Strategy

  • We are overweight on U.S., adding exposure to metals and mining sectors which will benefit from China’s reopening.9 We remain overweight on Europe as their economy did better than expected. Gas and oil prices falling from record high levels and a fuller storage means it’s less likely for Europe to run out of energy supply in this winter.11 In addition, manufacturing activities are likely to be supported by fiscal policies. We remain neutral on Japan.
     
  • We remain positive on Asian equities because of China's economic recovery and the earnings growth in Asia which is anticipated to be stronger than developed markets.
     
  • For our initial investment strategy for 2023, we recommend that investor:
    • Focus on income with exposure to growth to ride out volatilities arising from geopolitical tensions, inflationary issues, and recessionary concerns.
    • Position for sustainability themes including renewables, alternative energy, and food sustainability.


 

1. Universal Funds

  Risk Scale Fund Options

Low

funds

High

 Conservative 

•    Principal Islamic Money Market Fund
Mildly conservative

•    Principal Lifetime Bond Fund
•    Principal Islamic Lifetime Enhanced Sukuk Fund
•    Principal Islamic Lifetime Sukuk Fund
•    Principal Islamic Global Sukuk Fund
•    Principal Lifetime Enhanced Bond Fund
Moderate

•    Principal Lifetime Balanced Income Fund
•    Principal Islamic Lifetime Balanced Fund
Mildly Aggressive 

•    Principal DALI Global Equity Fund
•    Principal Asia Pacific Dynamic Mixed Asset Fund
•    Principal ASEAN Dynamic Fund
Aggressive

•    Principal Global Titans Fund
•    Principal Global Millennial Equity Fund
•    Principal Asia Pacific Dynamic Growth Fund
•    Principal Greater China Equity Fund
•    Principal China Direct Opportunities Fund
•    Principal Greater Bay Fund

 

 

 

2. Islamic Funds

  Risk Scale Fund Options
Low
funds
High		 Conservative 

•    Principal Islamic Money Market Fund
Mildly conservative

•    Principal Islamic Lifetime Sukuk Fund
•    Principal Islamic Global Sukuk Fund
Moderate

•    Principal Islamic Lifetime Balanced Fund
•    Principal Islamic Lifetime Balanced Growth Fund
Mildly Aggressive 

•    Principal DALI Global Equity Fund MYR
•    Principal DALI Asia Pacific Equity Growth Fund
•    Principal Islamic Asia Pacific Dynamic Income & Growth Fund 
Aggressive

•    Principal Islamic Asia Pacific Dynamic Equity Fund
•    Principal Islamic Small Cap Opportunities Fund

 

 

 

3. EPFMIS Universal Funds

  Risk Scale Fund Options
Low
funds
High		 Conservative 

•    Principal Islamic Money Market Fund
Mildly conservative

•    Principal Islamic Lifetime Enhanced Sukuk Fund
•    Principal Islamic Lifetime Sukuk Fund
Moderate

•    Principal Islamic Lifetime Balanced Fund
Mildly Aggressive 

•    Principal Asia Pacific Dynamic Income Fund
•    Principal Titans Income Plus Fund 
Aggressive

•    Principal Asian Titans Fund
•    Principal Greater China Equity Fund

 

 

 

4. EPFMIS Islamic Funds

  Risk Scale Fund Options
Low
funds
High		 Conservative 

•    Principal Islamic Money Market Fund
Mildly conservative

•    Principal Islamic Lifetime Enhanced Sukuk Fund
•    Principal Islamic Lifetime Sukuk Fund
Moderate

•    Principal Islamic Lifetime Balanced Fund
Mildly Aggressive 

•    Principal DALI Asia Pacific Equity Growth Fund
Aggressive

•    Principal Islamic Asia Pacific Dynamic Equity Fund
•    Principal Islamic Enhanced Opportunities Fund

 


You may obtain a copy of the Prospectus/Information Memorandum/Disclosure Document and its Product Highlight Sheet (if any) for the above-mentioned funds at our offices, distributors or our website at www.principal.com.my.

 

Click here to download the PDF format


Disclaimer:
We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of Principal Asset Management Berhad only and are subject to change without notice. This document should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell Principal Asset Management Berhad’s investment products. The data presented is for information purposes only and is not a recommendation to buy or sell any securities or adopt any investment strategy. This material is not intended to be relied upon as a forecast, research, or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. We recommend that investors read and understand the contents of the funds’ prospectus and product highlights sheet available on the Principal website, which have been duly registered with the Securities Commission Malaysia (SC). Registration of these documents does not amount to nor indicate that the SC has recommended or endorsed the product or service. There are risks, fees and charges involved in investing in the funds. You should understand the risks involved, compare, and consider the fees, charges and costs involved, make your own risk assessment and seek professional advice, where necessary. Past performance is not an indication of future performance. This article has not been reviewed by the SC..


Sources
1Bloomberg, 31 January 2022
2Federal Reserve Board, 31 January 2022
3Principal, 31 January 2023
4Bloomberg, 31 January 2023
5U.S. Bureau of Labor Statistics, 31 January 2023
6Federal Open Market Committee (FOMC), 31 January 2023
7JP Morgan, 31 January 2023​​​​​​​
8BofA Securities, 31 January 2023
9Bloomberg, 16 December 2022
10National Bureau of Statistics of China, 31 January 2023
11PGI, Bloomberg, 31 January 2023

 

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