Winner’s curse: Malaysia glove markers start 2019 with a plunge

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SINGAPORE (Jan 9): A group of Malaysian stocks that were unscathed during the global equity sell-off over the past few months is feeling some agony now.

Shares of Top Glove Corp. Bhd and Hartalega Holdings Bhd had rallied in the past two years, placing them in the top 10 best performers on the nation’s benchmark FTSE Bursa Malaysia Index. But in a sharp reversal, the companies along with peers Kossan Rubber Industries Bhd and Supermax Corp Bhd, have now lost more than US$1 billion in combined market value this year.

The strengthening ringgit, firmer crude oil prices and investors reducing exposure after the two years of outperformance, were among reasons for this year’s slide, Citigroup analysts, including Megat Fais and Patrick Yau, wrote in a note on Wednesday. “We have been cautious on the sector for a while now, and our stance is to maintain the status quo going into 2019,” they wrote.

Demand for rubber gloves should taper when Chinese supply comes back online after a environmental clampdown caused a temporary drop in production of vinyl gloves, according to Citigroup. “Material positive surprises need to come through, in order to drive another round leg-up in share prices,” they wrote.

Some investors are holding on. Ross Cameron, a fund manager at Northcape Capital Ltd which holds about 98 million shares in Top Glove, said these “short-term concerns” can be trumped by structural growth in the sector. The ringgit hasn’t started a bull run and oil prices have a small impact on margins, he said by phone.

Instead, consider the companies as a medical play, Cameron said. “You have to think of the glove companies really as healthcare companies," he said. 

"Remember the end-user is mainly healthcare, so it’s economically-insensitive volume growth."

Furthermore, production of Malaysian rubber gloves has grown by 8% to 10% over the last 20 years, even with the global financial crisis and economic downturns, Cameron said. Northcape oversees about US$7.2 billion in global equities.

Even with a rally across major Asian equity benchmarks today, Hartalega and Kossan shares are down. Top Glove is trading ex-dividend.