Market Commentary July 2023

5 min read     I     Date: 31 July 2023

Global Outlook

Global markets rebounded in June 2023, with developed markets outperforming the Asia-Pacific (APAC) region. Japan and the S&P 500 rose 7.5% and 6.5% respectively. In APAC, H-shares and India increased by 4.2% and 3.3% respectively, while Thailand declined by 2%. Bond indices were neutral to positive at 0.0-0.8%.1

On the monetary policy front, the US Federal Reserve (Fed) and European Central Bank (ECB) reiterated its resolve to bring inflation under control. The Fed raised its Fed Fund rate by 0.25% to 5.25% in May 2023.The Fed’s balance sheet shrinkage continued at USD95 billion.2

We are positive on Asian equities due to it being under-owned, inexpensive, and having realistic earnings estimates. In addition, China’s reopening and pivot to friendlier policies is another key driver. Within bonds we are now neutral on global developed market fixed income due to the increasing likelihood of further interest rate hikes by the Fed.3

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

 

Region: Developed economies

    Fixed income

  1. Our view – neutral.
  2. The United States (US) and Europe economic growth is likely to weaken moving to the second half of 2023 as higher interest rates and tight lending conditions impact businesses and consumers. US job openings, however, remained resilient.4
  3. The resilient US data increased the likelihood of further rate hike by the Fed. We have revised the duration band to 1.00x +10/-0.15 from 1.00x +20/-0.10.5

      Equity

  1. Our view – neutral.
  2. The United States (US) and Europe economic growth is likely to weaken moving to the second half of 2023 as higher interest rates and tight lending conditions impact business and consumers. US job openings, however, remained resilient.4 
  3. We maintain an overweight stance on Japan, rising on consumption recovery and potential exit deflation. US and Europe are both mildly Underweight.

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.6
  3. We expect investment grade Asian bonds to provide a gross yield of 5.00% to 5.75% in 2023.6

       Equity

  1. Our view – positive.
  2. This is underpinned by cheap valuation and China’s potential pivot to more friendly policies.7
  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 May 2023 declined to RMB62 billion owing to net redemption at State-Owned Enterprises (SOEs), local government financing vehicles (LGFVs) and the private sector.8
  3. The default rate in May 2023 rose to 0.20% from 0.19% in April 2023. The property sector default rose slightly to 4.1% from 4.0% over the same period.8

       Equity

  1. Our view – positive.
  2. In the recent National People's Congress (NPC) meeting, Chinese policymakers reiterated their stance to strengthen the economy and support for the property sector.7
  3. The manufacturing PMI for June 2023 rose marginally to 49 from 48.8 previously, while the Services PMI declined to 53.2 from 54.5 over the same period.9 

Region: Domestic (Malaysia)

       
       Fixed income

  1. Our view – positive.
  2. Bank Negara Malaysia (BNM) maintained the Overnight Policy Rate (OPR) at 3.00% in July 2023.10
  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 – neutral.
  2. We continue to focus on companies with firm fundamentals, strong cash flows and defensive.
  3. We have a barbell strategy for Malaysia but with limited upside. On balanced, we favour REITs and Utilities. We also favour selected Technology names.

Our Strategy

  • We maintain an overweight stance on Japan, on the back of greater tourist influx, recovery in consumption and potential exit from deflation. We are marginally underweight on US and Europe due to growing concerns of high valuations and growing recessionary pressures in the second half of 2023.
  • On equity, we are positive on Asia as earnings growth is expected to be stronger than developed markets. In addition, the potential for Chinese policymakers to pivot towards more friendly policies supported our conviction on Asia.7
  • The commitment of the Malaysia government to lower the budget deficit to 5% and 3.2% by 2023 and 2025 respectively and the projected improvement in fiscal position over the medium term would significantly benefit and enhance the attractiveness of the domestic bond market.
  • Our investment strategy for the second half of 2023, we encourage investors to:
    • Adopt an income-focused to ride out volatilities arising from geopolitical tensions, inflationary issues, and recessionary concerns. The growth element for the portfolio will emanate from tapping into Asia and China’s economic recovery from the reopening.
    • Position for sustainability themes including renewables, alternative energy, and food sustainability.


 Our Fund Options

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 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 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 Lifetime Enhanced Bond Fund
• Principal Lifetime Bond Fund
Moderate

• Principal Islamic Lifetime Balanced Fund
Mildly Aggressive 

• Principal Titans Income Plus Fund
• Principal Dali Asia Pacific Equity Growth Fund
• Principal Titans Growth & Income 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 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
1 Bloomberg, 30 June 2023 
2 Federal Reserve Board, 30 June 2023 
3 Principal, 30 June 2023 
4 U.S. Bureau of Labor Statistics, 30 June 2023 
5 Federal Open Market Committee (FOMC), 30 June 2023 
6 JP Morgan Research, 30 June 2023 
7 Bloomberg, 30 June 2023 
8 BofA Securities, 30 June 2023  
9 National Bureau of Statistics of China, 30 June 2023 
10 Bank Negara Malaysia, 6 July 2023

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