Sep 23, 2013

Maintain KLCI year-end target at 1,800 points - MIDF.

No taper yet  KLCI: 1,771.40.  To exert downward pressure on longer-term interest rates

Economic  recovery  seen  but... The  US  economy  is  progressing  “at  a  moderate  pace” on  the  road  to  recovery However the US Fed is unsure on its sustainability.While most of the economic indicators are favorable, recent rise in  longer-term  interest  rates  is  not  supportive  of  the  mortgage  markets  and  is  less  accommodative  to  a stronger economic recovery.
•  Labor market conditions – improved (FAVOURABLE)
•  Household spending – advanced (FAVOURABLE)
•  Business fixed investment – advanced (FAVOURABLE)
•  Housing sector – strengthening (FAVOURABLE)
•  Long-term inflation expectations – stable (FAVOURABLE)
•  Mortgage rates – rising (UNFAVOURABLE)
•  Unemployment rate – remains elevated (UNFAVOURABLE)
•  Fiscal policy – restraining economic growth (UNFAVOURABLE)

…no  taper  yet  as  the  US  Fed  needs  more  evidence  of  sustained  progress… Hence  the  FOMC  said  that  it  needs “more evidence that progress will be sustained before adjusting the pace of its purchases”.

…as well as to reverse recent tightening of financial conditions.While the US Fed believes “the downside risks to the outlook for the economy and the labor market ashaving diminished”, but “the tightening of financial conditions observed  in  recent  months,  if  sustained,  could  slow the  pace  of  improvement  in  the  economy  and  labor  market.” Hence the decision to not to taper (yet) is meant to:
•  Exert downward pressure on longer-term interest rates, i.e. support mortgage markets, which in turn shall
•  Help  to  make  financial  conditions  more  accommodative,  i.e.  promote  a  stronger  (and  more  sustained) economic recovery.

Verdict: Taper overhang persists.The local market (as well as other regionals) is expected to react positively on this  development.  Nevertheless  the  overhanging  worries  over  the  eventual  timing  and  pace  of  QE3  taper  persist. Maintain KLCI year-end target at 1,800 points.

by MIDF