Global markets traded mixed in May as investors watched for signs of progress in the US debt ceiling negotiations ahead of the June 1 deadline. To recall, the debt ceiling has been raised nearly 80 times since 1960, indicating that it is not something new and it is just a recurring practice to adjust the limit on the amount of debt the US government can incur (see Figure 1). Throughout history, the US has never defaulted on its debt. However, an exception occurred in 2011 when the US experienced its first-ever credit rating downgrade by S&P. This situation was eventually resolved when President Obama consented to over $900 billion in spending cuts, and the debt limit was lifted by a similar amount.
Figure 1: US public debt and debt ceiling
Source: US Department of Treasury, US Office of Management and Budget
And finally, after some negotiations, the US House of Representatives had on 31 May, passed a bill to suspend the US$31.4 trillion debt ceiling to avert a national default. We expect this to alleviate some market overhang and boost investor sentiment going forward. In addition to that, given the USD’s unique status as the global reserve currency, there is unlikely a sustained effect on the USD due to the debt ceiling issue. In the near to middle term, investors will closely monitor policy actions taken by different central banks and keep a close eye on developments related to geopolitical tensions.
China’s recovery has been bumpy after three years of self-imposed isolation, and there have been concerns on soft domestic demand and weak manufacturing data (see Figure 2), as well as muted sentiment within the property sector, but we think a modest 5% target by the Chinese government should be attainable. China’s recovery thus far has predominantly focused on the services sector, with robust activity observed in this area. Furthermore, there have been supportive polies supporting the sentiments, and the leaders have pledged support to boost the economy. Moreover, the PBOC has been guiding that it will maintain ample liquidity, stabilise growth and jobs and focus on expanding demand. China’s immediate priority is to restore confidence among private and foreign investors via policy support, and there is still a lot to be done, in our view.
Figure 2: Manufacturing PMI unexpectedly contracted in April; while growth is mainly driven by the services sector
Source: UOB Kay Hian
On the domestic front, the latest quarter revealed a potential downside risk to earnings as companies reported results that either met or fell short of expectations (especially in the tech, industrial, and plantation sectors), with only a few beating consensus estimates. Several companies were negatively affected by escalating costs, such as rising electricity and labour costs. We continue to believe the Malaysia’s market is likely to stay challenging in 1H23 due to some earnings risks from rising costs. Nonetheless, we expect a sustained market recovery in 2H23, driven by improving earnings outlook (in the absence of prosperity tax and other taxes like gaming tax), low foreign holding and relative political stability. Malaysia’s fundamentals remain strong on firm domestic demand and resilient external trade activities. On the positive side, given our strong diplomatic relations with China, China’s economic recovery is raising our prospects for improving bilateral trade and returning Chinese tourists.
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The information contained herein does not constitute an offer, invitation or solicitation to invest in Phillip Capital Management Sdn Bhd (“PCM”). This article has been reviewed and endorsed by the Executive Director (ED) of PCM. This article has not been reviewed by The Securities Commission Malaysia (SC). No part of this document may be circulated or reproduced without prior permission of PCM. This is not a collective investment scheme / unit trust fund. Any investment product or service offered by PCM is not obligations of, deposits in or guaranteed by PCM. Past performance is not necessarily indicative of future returns. Investments are subject to investment risks, including the possible loss of the principal amount invested. Investors should note that the value of the investment may rise as well as decline. If investors are in any doubt about any feature or nature of the investment, they should consult PCM to obtain further information including on the fees and charges involved before investing or seek other professional advice for their specific investment needs or financial situations. Whilst we have taken all reasonable care to ensure that the information contained in this publication is accurate, it does not guarantee the accuracy or completeness of this publication. Any information, opinion and views contained herein are subject to change without notice. We have not given any consideration to and have not made any investigation on your investment objectives, financial situation or your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any persons acting on such information and advice.