- 19 hours ago
Despite geopolitical uncertainty and higher-for-longer interest rate expectations, markets continue to push higher. Is the rally built to last? Cynthia Ng speaks with Kenny Yee, Head of Research at Rakuten Trade, on the outlook for markets in the second half of 2026.
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00:10Hello, you are watching Awani Review. My name is Cynthia Ng.
00:14The first half of the year has challenged plenty of assumptions.
00:17Geopolitical tensions continue to keep investors on edge.
00:21Hopes for Fed rate cuts have all but faded this year.
00:24However, enthusiasm in artificial intelligence has helped lift global equities to near record highs.
00:32So where do markets go from here and will investors have to rethink their expectations for the rest of 2026?
00:39Joining me on the show today to talk more about this is Kenny Yee, Head of Research at Rakuten Trade.
00:45Kenny, welcome back to the show as always. A pleasure to have you here.
00:48Thank you. Likewise. Always glad to be here.
00:50Let's start with the big picture as I mentioned.
00:52Despite everything that we have been seeing the past six months or so, markets have held up remarkably well.
01:00What has been, do you think, the biggest driver of that resilience?
01:03I think first and foremost, the only thing I can think of is the ample liquidity within the financial market.
01:12I think, let's not forget, you know, during the height of the QE's, quantitative easing, I think the FEDs has
01:19inadvertently printed, if I'm not mistaken, about 8 trillion USD.
01:25You know, I think there's still about 6 over trillion floating around the financial system.
01:30So, these are the catalysts for, you know, strong capital markets at the moment.
01:37And also, the way I see it, the stock market and also the reality, I think there's been really a
01:45detachment, you know, along the way.
01:48You know, I think what you see on the stock market, actually, it's not the reality of the, you know,
01:55economic situation.
01:56Yeah, so I think I want to bring that in quickly, because if you look at valuations, U.S. equities
02:00are still trading at historically high levels.
02:04Are they becoming harder to justify, going back to the gap between what we're seeing in the markets and reality?
02:12True, but as usual, you know, the Westerners, they are very good in managing expectations.
02:18And we've got this saying that I always like to use, valuation is an art.
02:23If you like the art, right, I mean, despite whatever price you're willing to pay, you know, justified.
02:31You know, so now, you know, I think the Nasdaq is trading at about 40-odd times, while the S
02:35&P and Dow Jones trading over times.
02:38And it's almost double their historical averages.
02:41You know, so whether this art is a piece, you know, that you like or not, it remains to be
02:47seen.
02:47But for me personally, I would say it's overvalued.
02:51Okay.
02:52Definitely.
02:52Let me hone in on that a bit, because despite the headwinds that we're seeing in other places,
02:58AI has continued to drive markets.
03:00Big tech, cheap makers, not just in the U.S.
03:03We're seeing in South Korea, for instance.
03:06Do you think that the AI story still has room to run?
03:12For me, I think it's coming to the end of its league.
03:16I think the funds flow into both South Korea and Taiwan, I think it's after there's nothing to run, or
03:29there's nothing left to run in the U.S.
03:31You know, so the funds are moving over to these countries, you know, purportedly to be, you know, the atas
03:40of the AI level, South Korea and Taiwan.
03:45That's why over the past year, I think, if I'm mistaken, the Cospi has gained about 130%, while Taiwan's stock
03:54exchange index has doubled, gained about 100%.
03:58You tell me, I mean, you know, they drew a lot of hot money into the market, and this hot
04:04money can just live anytime.
04:06And you see, Cospi, for instance, is largely driven by SK Hynix and Samsung.
04:11Yeah, just a handful, less than a handful of stocks, you know, so that it's extremely dangerous.
04:18You know, I think if this hot money does really flow out from these two markets, right, imagine the impact
04:24on the market itself.
04:27That's why I think some of the others, like it or not, there's a hint of a yen carry trade
04:32again there.
04:33Okay, yen carry trade. Let's go direct to Japan because BOJ raising rates to defend the yen, of course, are
04:41historically low.
04:43Yen carry trade is one of the big risks that you've highlighted in your latest market outlook.
04:47What is yen carry trade for viewers who may not be familiar, and why does it matter beyond Japan?
04:52Okay, I think this yen carry trade did come to the picture, I think, when the interest in Japan, right,
05:01was almost at zero.
05:03You know, I think you borrow from Japan, zero percent, cheap funding.
05:08Then you use money, right, you invest elsewhere, especially in the US, you know, I think easily their bonds, treasury,
05:15command about four and a half percent or four percent.
05:19You know, immediately you get profit or returns there.
05:23So this is the impact of yen carry trade. You know, you borrow low, go to another investing country that
05:33offers a better return.
05:35That's basically it. Nothing sophisticated about it. You know, so it's easy as pie.
05:42But now the situation has turned that the BOJ, they intend to defend the chronic weaknesses of the yen against
05:51the USD.
05:53You know, I think if I'm mistaken, when everything is normal, right, the yen was trading at around 100, 110
06:01yen per USD, one dollar.
06:04Now you're talking about 160 over, you know.
06:07So in actual fact, they lost about 50 percent in their value of the yen against the USD.
06:13So I think what Bank of Japan is doing now, maybe they are looking to hike rates higher.
06:21Now it's at a 40 year high, about 2.7, 2.8 percent to stop the rot, but still fail
06:30because yen still continues to weaken.
06:33You know, so what they are doing now in the latest move is to persuade a lot of those Japanese
06:39pension funds to hold more Japanese denominated assets.
06:44You know, and stop the massive outflow of funds, you know, elsewhere overseas.
06:51So meaning to say this pension fund, they need to sell their holdings outside Japan, bring it back, invest in
06:59their own asset.
07:01So meaning to say the non-Japanese denominated asset, right, will see some heavy selling.
07:08So higher volatility.
07:10Now, if the yen carry trade does begin to unwind, where do you expect to see the first sign of
07:16stress?
07:16Is it equities, bonds or emerging markets?
07:19I think equities first.
07:20You know, from the equities, and then the two countries that I mentioned now, you know, Taiwan and South Korea,
07:25these are the two countries that we need to closely keep an eye on, you know, after such a sharp
07:33ascension during the last 52 weeks.
07:37You know, so these are the two countries.
07:39I think Malaysia, we are relatively safe because, you know, of a rather small market, you know.
07:46So I doubt, you know, if there's any impact, it will be very minute.
07:51Okay, okay.
07:53I think the South Korea, Taiwan, and also the Wall Street, that would be the main ones.
07:58Okay, but that certainly will have an impact on emerging markets as well.
08:01Definitely, but the impact may be a bit muted than, you know.
08:05Okay, if that does happen, are there any opportunities for Malaysia?
08:09Do you see?
08:10Okay.
08:12I think we cannot escape, you know, from all this, if there's a global downtrend now or mini-crisis, whatever.
08:20I think what we can do is that, you know, I think we still view that Malaysia, on the whole,
08:24is still viewed as a very captive market,
08:27whereby, you know, our market is very shielded from the extreme externalities outside.
08:35Okay.
08:36You know, whereby, if you look at the volatility among the region, ours, the market volatility is the lowest.
08:43I think from as far back as I can remember, it is the lowest.
08:47Okay, and that's because we are largely held by domestic funds.
08:50Correct.
08:51So, I think we've got enough cushion to shield the external shocks, unlike other countries.
08:58Okay.
08:58So, Malaysia is great for capital preservation when things are happening.
09:03Correct.
09:04Elsewhere.
09:05Okay.
09:05At the time like that, they say, well, Malaysia is terror, you know.
09:07But when the market goes up, you know, Malaysia seems to be very boring.
09:11Okay.
09:11Okay.
09:11Alright.
09:12Now, if we look at Japan, we're talking about Japan, and I want to talk about US, of course.
09:16US and Japan both are having similar situations, very high debt, low interest rates by historical standards,
09:22I'm sure, Japan has raised a bit, weaker currency.
09:25Now, is this combination, I want to get a sense of the risk that it's creating to global financial markets.
09:30Okay.
09:30Okay.
09:31Okay.
09:31In our latest report, I mentioned that, you know, we are in a daily love triangle.
09:37Okay.
09:37High national debt, I think especially in the US, 39 trillion.
09:41I think that should translate into about a yearly interest payment of 1.2, 1.5 trillion USD.
09:49A loan, interest payment.
09:51And then after that, you know, you talk about the interest rates.
09:54Okay.
09:55I think, notwithstanding the consensus, expecting another one or two hikes from the Fed strike.
10:01Personally, I feel that this new chair, I think he'll be highly reluctant to hike rates.
10:09Instead, at best, he will maintain the rates.
10:11Or if there's a pocket of opportunity, he would cut rates.
10:16Okay.
10:17So, if he does so, right, I think there will be definitely a weaker USD.
10:21Right.
10:22And then the impact would just flow.
10:25You know.
10:27I mean, likewise, I mean, on the flip side, Japan is different.
10:32Okay.
10:32I think definitely hike rates, sending their overseas investments, you know, raise some volatility.
10:40You know, just to, I think their main aim now is just to lower down their imported inflation
10:45and strengthen the yen, which they have failed to do so far.
10:49Okay.
10:50Let's stay on Fed for a bit, because if rates to stay pet for the rest of the year,
10:54what does that mean for markets?
10:56I think slightly positive, because it is better than, you know, the one or two rate hikes
11:03that the consensus is expecting.
11:05You know, so long, you know, there's no hike, I think this should be slightly positive to the equity market.
11:11Okay.
11:12I also want to touch on geopolitics, of course, as one of the big themes since Trump came back into
11:19power.
11:20Okay.
11:21As it stands today, on 15th of July, at least when we're speaking today, the ceasefire is off again.
11:28Last week was on.
11:29We may not know what's going to happen next week or tomorrow.
11:31Tomorrow will be on again.
11:32Okay.
11:34How much is that still influencing investment decisions or have investors become desensitized towards the headlines?
11:42I think we are getting really irritated about all this and also numb, you know, from the on-off ceasefire,
11:53Trump and his Iranian counterpart.
11:57So, personally, for myself, you know, what Trump says regarding the tension in the media is, I tend to give
12:07an 80% discount.
12:10Okay.
12:11And wait for the actual outcome of whatever, you know, despite his tweets or whatever, you know.
12:17So, I rather dismiss his initial reaction, you know, things like that.
12:24So, I think likewise, I think all the market participants, they will be doing the same thing as well.
12:30Because since the war started in April, right?
12:34April.
12:35February.
12:35February.
12:36February.
12:37No, four months.
12:38About three months, really three, four months, you know.
12:41I think from an expected 100-meter sprint now, it's a marathon.
12:45You know, I think a lot of market participants are getting a bit fed up.
12:53Okay.
12:53Now, rareness is one thing.
12:55But if you look at the impact, of course, oil prices, and then it feeds into inflation and higher cost
13:00for regular people like us.
13:02Yeah.
13:02So, that, of course, you must take into consideration.
13:05That's another thing.
13:07It differs from month to month, you know.
13:10I think when the ceasefire is off, you know, I think when the crude oil prices were high, you see
13:17that impact for the particular month, the inflation high.
13:20But in June, the inflation is actually weaker than consensus forecast, you know.
13:27So, now we have CPI figures or inflation figures that's as volatile or as crazy as, you know, the developments
13:37on the Middle East.
13:39So, that's why, you know, as for the FEDs to make a firm decision on interest rates, right, I think
13:48they would be very difficult for them.
13:52You know, that's why this Kevin Walsh, unlike the previous FED chair, he did not give any hints or outlook
14:00of his personal view on the prospective interest rate movement, lower or higher.
14:07He gave it very close to himself, you know.
14:10So, that's why it's anybody's guess.
14:13But I, for me, I believe that he will maintain interest rate for the rest of the year.
14:18Okay, alright.
14:19Okay. So, we've talked about US, we've talked about Japan, China.
14:24I remember that you were feeling quite positive China in the first quarter.
14:26I used to feel the same.
14:28I'm just going to throw this in because we just got numbers today that China's second quarter GDP has come
14:33in far lower than expected.
14:35Right. I think, like we mentioned just now, I think, yeah, you're right.
14:40I'm still very positive on China, despite this low than expected GDP growth for second quarter, right.
14:48I think they're still facing problems with domestic consumption.
14:56But, of course, that needs time to revive.
15:00You know, I mean, you cannot just say, hey, you know, just revive the economy, you know, go out and
15:07spend till you drop.
15:08You can't do that. So, you just need confidence.
15:11I think from confidence, that's where the so-called stock market will come in.
15:16So, you know, if the Chinese stock market, Hong Kong stock market doing well, naturally, you'll see the domestic consumption
15:23improve over time.
15:26Okay. All right. Okay. Let's bring this closer to home. Let's talk about the ringgit.
15:31In your latest outlook, you're projecting ringgit to hover around 380, 390 to the dollar.
15:37What's behind that view?
15:39Again, that's based on my view that the Fed will not hike rates. In fact, you know, they will at
15:47best maintain or a slight reduction in the rates.
15:53You know, that would add some strength to the ringgit. That's why, you know, I opted for a 380, 390
15:59range.
16:00You know, because now at the moment, we are at above the 4 ringgit level because of the current uncertainty,
16:06you know, in the Middle East.
16:08And also the poker face of Kevin Walsh. You know, yesterday, he's poker face very well.
16:15Okay. So, no indication at all. No indication.
16:18Okay. Now, of course, we're looking at the Middle East conflict, just going back to that, because it might look
16:24like it will drag on a bit further,
16:26perhaps maybe even up till, you know, the midterm elections, right?
16:29Right. So, how do you think that will impact where the ringgit moves or the dollar, rather?
16:37I think I'll still stick to, you know, my view about the ringgit. You know, I think it will possibly
16:46strengthen a bit more.
16:48Okay. Because, you know, I think you see that the ringgit against the dollar is pretty stagnant, you know, around
16:54the 407, 406 level.
16:56You know, it's not making any wild movements, you know, from this level.
17:02So, I think if there's any positive development, I believe that the ringgit will strengthen even more and hopefully it
17:09will go below the 4 ringgit level.
17:11Okay. So, that's ringgit. But if you look at Malaysian market, how does it translate into your outlook?
17:15Because you had lowered your KLCI target to 1770.
17:20What has changed, Kenny?
17:22It's actually the overall earnings, you know, of the FPM KLCI.
17:31I think there are some fine tuning of results after the latest corporate results season.
17:41So, basically, it's just from that, you know, I think nothing major overhaul in the figures.
17:47You know, just that some fine tuning of earnings for this year, that's it.
17:53You know, I think no big deal.
17:56But having said that, I'm hopeful that if this expansion of stocks within the FPM KLCI from 30 to 50
18:07comes through by year-end,
18:10that would be another positive for the market as well.
18:14Liquidity.
18:15Correct.
18:15Correct.
18:16And that will also encourage people to look at the second layer of companies that we like, you know,
18:24within the plantation or the construction sector.
18:26Okay. Well, let's talk about that.
18:27Given everything that we've covered, from your latest outlook report, you're still positive on banks for the dividends
18:34and plantation stocks, you just mentioned, two sectors often seen as defensive.
18:38Yeah.
18:39Is that because this sector simply offers that kind of earnings visibility or just because it's largely more stable?
18:48Everything. Earnings visibility, defensive, steady.
18:50You know, I think now, I think everybody is, I think if you can, you know, enter into a capital
18:56preservation mode, all the better.
18:59You know, I think these two sectors offers you that.
19:04But I must comment on the plantation sector. I think that has slightly surpassed my expectation as well.
19:11Okay. Why is that so?
19:12I think maybe people are expecting a more extreme weather condition. I only know.
19:20So that would have a serious impact on the supply side. But we haven't seen that yet. But I think,
19:27as you know, I think market is quite efficient sometimes.
19:30You know, so possibly we are charting to that direction that the CPO price may see, may have more legs
19:37to go higher.
19:37Okay.
19:38You know, but now it's quite resilient at the 4,500 per ton level. You know, I think maybe it
19:46can surpass that.
19:47Do you see plantation to hold up until through 2027?
19:51At least until?
19:52At least for, at least until end of this year.
19:54Okay.
19:55All right. So that aside, if you look at real money signal in terms of flows, right, we did see
20:01large foreign outflows. This was back in May, about close to 600 million ringgit.
20:06Is that telling us something about Malaysia or is it simply a reflection of global capital chasing?
20:13I don't know whether it's coincidence or not. I mean, you're talking about the net flows from the foreign side.
20:17You know, I think things were, how to say, going quite well, you know, from the start of this year,
20:25you know, until the first quarter.
20:27I mean, it was all right. You know, net inflows from the foreign side until May and June.
20:33You know, we saw huge outflow. Whether it's coincidence or not, that's when we encounter some domestic political ripples.
20:43You know, when Rafizi exited and formed his own party, this and that. You know, I'm not sure, but that
20:54coincide with the huge net outflow, especially in May and June.
20:59You know, we saw about, I think, maybe 3 or 4 billion net outflows, you know, which was huge.
21:07So, I can only point a finger to that.
21:10Okay, okay. Now, interesting. I do want to ask you, to what extent do investors factor political cycles into that
21:17investment decision in Malaysia?
21:19Johor State election, of course, is now behind us. Next up is Negeri Sembilan. And of course, attention will inevitably
21:24turn into the general election.
21:30I don't know. I mean, what do you say?
21:34Based on what you've observed in the previous cycles?
21:37I did a study on pre- and post-election.
21:43Actually, there's no direct correlation.
21:45Okay.
21:45There's none. Except when the results are beyond expectations.
21:50You know, especially when the last one was when BN lost.
21:55That one we saw some drastic reaction on the market.
22:01But apart from that, there's no direct correlation.
22:03Okay. All right. Just a few minutes that we have left, Kenny.
22:06We've talked about how KLCI has always been seen as a more domestically driven market,
22:11supported by local institution funds that make us attractive because we are stable.
22:15But does it also mean Malaysia struggles to attract excitement, fresh foreign capital?
22:20Yes. You're right in that sense.
22:22Because if you track the foreign shareholding for the Malaysian equities, right,
22:32it's still hovering at 18% to 19%.
22:35You know, again, it's not too bad, you know, compared to 13%, I think the last three, in 2023.
22:41You know, I think 18%, 90%, not too bad, but it's not good either.
22:46You know, for me, I think we should surpass the, maybe the 25% level.
22:53You know, you're right.
22:55I think maybe Malaysia, we are lacking the more liquid, mega, ginormous companies for foreign investors.
23:06I think a lot of foreign investors, they view our market still as a smallish market.
23:11You know, lacking of liquidity.
23:14Is this an emerging market? When I say emerging market, let's look at Southeast Asia.
23:17Is that a Southeast Asian market issue or how do we stack up against our regional peers?
23:24Regional peers, you mean within the Southeast Asia region?
23:28Yeah, I think before the development in Indonesia, I think Indonesia has been performing very well.
23:35You know, then we saw Vietnam, not too bad.
23:39You know, I think Philippines, Thailand, so-so, I think us like, you know, stop start.
23:44We are right in the media, you know, this is the league.
23:47You know, I think Indonesia has been the main one, but unfortunately Indonesia then hit some controversies.
23:56Yeah, so there was a massive sell-down also on Indonesia.
24:03So by default, maybe now, you know, some of the funds may flow back, flow into Malaysia.
24:08You know, that's what we are hoping for.
24:11Okay. Final note, second half, 2026, what are you turning your focus toward?
24:18What are you keeping, what's keeping you excited and what should, do you think one thing that we are not
24:23worrying about enough?
24:26Okay. The things that we are not worried about enough is certainly the impact from the Yen, potential Yen carry
24:33trade. That's one thing.
24:34Look forward to, I would say again, the plantation and also the banks.
24:40I'm surprised from the recent, from the last reserve season, right, there's been a slight downgrade on banks' earnings.
24:50You know, but hopefully for the second half of this year, we may see earnings from the banks being picked
24:57up again.
24:58Okay. You know, so banks, earnings, plantation, that should be the star.
25:04Okay. All right. Well, thank you once again, Kenny.
25:07Okay. Always a pleasure to have you on the show.
25:08Thank you so much for having me.
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