Market Commentary January 2023

5 min read     I     Date: 30 January 2023

Global Outlook

The performance of equity markets in Developed Markets declined  In December 2022, while Asia Pacific markets showed mixed performance. The S&P500, Nikkei and Europe declined by 5.9%, 6.7% & 3.4% respectively. In Asia Pacific markets,  Chinese H-shares listed in Hong Kong, Thailand and Malaysia increased by 5.2%, 2.0% and 0.4% respectively while South Korea and Taiwan markets each dropped by 9.6% and 5.0%. Bond indices rebounded owing to lower quantum of rate increase by the  U.S. Federal Reserve (Fed).  The indicators increased ranging between 0.5% to 1.1%.1

On the monetary policy front, the Fed and European Central Bank (ECB) reiterated its resolve to bring inflation under control. The Fed’s balance sheet shrinkage started in June 2022 at a run-off rate of USD47.5 billion before rising to USD95 billion in September.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 fundamentals has shown signs of weakening. There is downside risk to growth & earnings following the strong statements to control inflation by the Fed and ECB.5
  3. The Fed raised interest rate to 4.00%-4.50% with a smaller 50 bps hike. The terminal rate is forecasted at the 5.10% 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 high.5
  3. We are now underweight on the U.S. as earnings downgrades increased. European Union (E.U.) is revised to overweight  economic data surprises to the upside. 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.
  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. 
  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 September 2022 decreased by RMB11 billion from an increase of RMB387 billion the month before. The drop emanated from both the State-Owned Enterprises (SOEs) and private sectors.8  
  3. The default rate in September 2022 decreased to 0.35% from 0.40% the month previously.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. December 2022 decreased to 47 from 49.2 previously, while the Services PMI decreased to 41.6 from 48.7. The weaker data highlighted the impact of the rolling lockdown.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. We still prefer consumer discretionary and remain cautious on commodities. We are overweight on selective banks, consumers and reopening plays (companies that benefits from economic reopenings amid the coronavirus pandemic.

Our Strategy

  • We are now underweight on U.S. as we start to see earning downgrades. We are adding exposure to metals and mining sectors which will benefit from China’s reopening.9 We revised Europe to overweight as economic data surprises to the upside. 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. We will also continue to focus on quality companies which have good earnings visibility, robust balance sheet, long term winners, market share gainers and those with pricing power to overcome cost pressures.
     
  • In short, investors are advised to:
    • 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 December 2022
2Federal Reserve Board, 4 May 2022
3Business Today, 13 October 2022
4Bloomberg, 26 December 2022
5U.S. Bureau of Labor Statistics, 6 January 2023
6Federal Open Market Committee (FOMC), 14 December 2022
7JP Morgan, 31 December 2022
8BofA Securities, 30 September 2022
9FBloomber, 16 December 2022
10National Bureau of Statistics of China, 31 December 2022
11Bloomberg, 25 October 2022

 

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