The month of November saw a huge drop in global equity markets. For Malaysia’s KLCI, the index approaches its year low of around 1,660. Have we reached the bottom yet? Would we see a re-bound soon? May be and just may be, we may see a possible ‘mild’ re-bound due to year end dressing.

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Narrowing differential yield tells a different story despite KLCI reaching near its historical low. 

KLCI vs MGS vs EY vs UST.png

Current yield differential between earnings yield of FBMKLCI and MGS10Y of 138bps is significantly below its historical median differential of 194bps. This may signify potential over-valuation associated with FBMKLCI, assuming that earnings growth of KLCI companies continues to remain flat or negative in the immediate term.

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From a different perspective, the 200-Day moving average of yield differential (KLCI vs MGS) is on a declining trend, reaching its historical low since 2010.

200D KLCI vs MGS.png

In addition, as we anticipate further rate hikes in the US, the MGS yield differential (vs UST) has fallen below its historical median and is on a declining trend. This may potentially signal that the Malaysian borrowing rate has to play catch up with the rising yield in the US. Indirectly, this would potentially translate into higher yield spread required on the Malaysian equity market.

MGS vs UST.png

In a nutshell, as long as yield differential narrows and earnings growth remains flat / negative, I will be quite cautious with equity market.

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