Brokers Write

This article first appeared in Capital, The Edge Malaysia Weekly, on December 28, 2020 - January 10, 2021.
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Vincent Khoo

Head of research

UOB Kay Hian Research

Uneven recovery in 2021 after a year of contrasting superlatives

This year began with an unprecedented triple-whammy infliction — the creation of a backdoor government, fallout in the Opec-Russia production quota agreement and, most ominous, the Covid-19 pandemic, which induced globally concerted lockdowns. The lockdowns crashed global economies and induced extremely dysfunctional capital markets — wild credit spreads and extreme movement in the Volatility Index for US equities, many spectacular limit downs and limit ups, and a historic plunge of WTI crude oil (May) futures contract prices to -US$37 a barrel.

Malaysia had more than its fair share of domestic woes — debt downgrade by Fitch, constant political rife, and three water supply disruptions in the Klang Valley — and the country had to endure a third and more powerful wave of Covid-19 infections in October after a state snap election was held in Sabah. Nevertheless, the government lockdown also induced the swiftest policy responses at both the fiscal and monetary fronts, including unprecedented fiscal stimulus, a bank loan moratorium and a ban on short-selling of equities. Such prompt policy responses have been instrumental in swiftly bringing the global equity markets out of the bear markets, induced record retail investor participation and Fear of Missing Out (FOMO) trades and charged the index into bull market territory after glove producers revealed unimaginable hikes in product prices (more than five times higher at year-end) as global demand surged.

Finally, optimism of an effective vaccine find in November, following the encouraging final-stage trial results of prominent biotech companies such as Pfizer-BioNTech and Moderna, further reinforced the full recovery in the FBM KLCI. Economic-reopening plays dominated market momentum, most prominently banks, aviation and gaming stocks.

Flattish returns in 2021

For 2021, we expect the FBM KLCI to generate flattish returns but produce a wide breadth of winners as the global dissemination of World Health Organization-endorsed Covid-19 vaccines gradually ushers back consumerism and enables the gradual reopening of borders. Market valuations will price in economic and business recoveries through 2022, backed by globally dovish policies (with no overtures of policy rate hikes throughout the year). Characteristically, there will be lower market volatility, but the market’s recovery will be uneven, mainly mirroring the spotty K-shaped economic recovery, as the current wave of Covid-19 nationwide infections continues to ravage the economy and, particularly, small and medium enterprises.

Economic recovery will be slow, in tandem with the slow mass dispensation of Covid-19 vaccines. Consequently, we brace for more business closures or consolidations in 1H2021, as well as rising bank non-performing loans after the expiries (in mid-2021) of the government-mandated loan repayment moratorium for B40 income earners, alongside the bulk of banks’ rescheduling and restructuring programmes. Our view for a potentially moderate market consolidation towards mid-2021 also factors in challenges to the federal government’s revenue and fiscal deficit, which dampen the deployment pace of mega projects. Market sentiment may also turn slightly cautious again in 2H2021, in pricing in a potential snap general election.

We peg our end-2021 FBM KLCI target at 1,640, valuing the market at 14.9 times 2021F price-earnings ratio, or -1 SD to the historical mean PE of 16.2 times. The top down year-end target is prudent and is well below our bottom-up FBM KLCI target surpassing 1,700. This would be the first time the FBM KLCI is expected trade below mean valuation in many years as the glove sector, which accounts for a sizeable chunk of index weightage of 14%, would be trading significantly well below the FBM KLCI’s mean PE to factor in the sector’s super-cycle earnings in 2021.

To optimise returns, we prescribe a dynamic strategy involving cyclical, yield and value, and growth investment themes in calibrating to the uneven economic recovery. We recommend taking on a more risk-on approach at the start of the year, then turn defensive by 2Q2021, before turning risk-on again, particularly for late-cycle stocks in 2H2021. Even after the impressive gains since November, most reopening plays are expected to outperform in 1Q2021, although many of these stocks are expected to give up some gains in 2Q2021 to reflect the ongoing sombre economic conditions.

Thematically, we embrace the economic reopening, trade diversion, global 5G roll-out and high dividend yielder investment themes.

For 1Q2021, we recommend to “overweight” the retail and F&B segments, gaming and, tactically, banks (although expect an uneven outperformance), as well as selected exporters (electrical and electronics and manufacturers). Real estate investment trusts would also outperform. However, personal protective equipment-related stocks may underperform, particularly after 1Q2021, and we would still avoid companies that feature Z-scores in the financial distress zone (for example, AirAsia Group and some property companies). There are high risks that companies with exceptionally low Z-scores may need to recapitalise, which could be significantly dilutive to shareholders.

Meanwhile, we advocate to only “market weight” cyclical sectors, which are highly dependent on government-related expenditures (construction and selected oil and gas stocks) and sales of high-ticket items (automobile and property sectors).

Teoh Kok Lin

Founder and chief investment officer

Singular Asset Management

Weeks where decades happen

To describe 2020, a quote by Lenin comes to mind: “There are decades where nothing happens, and there are weeks where decades happen.” This year has been a series of “weeks where decades happen” — the pandemic, and with it, a global health crisis intertwining with an economic crisis, has, in many aspects, accelerated significant change.

Investors who were able to perform well in 2020 tended to be those who recognised, early on, the many changes brought about by Covid-19: digitalisation in businesses; countries with robust pandemic response, health infrastructure and stronger policy headroom; sectors with extreme return divergences (stay-at-home beneficiaries versus travel-related names); companies with nimble management and balance sheet strength; and “revenge spending” by households versus holding on to safety nets. These themes were crucial, on top of understanding the key macro forces at play.

Spend what it takes

At the macro level, we have seen massive economic stimulus far surpassing records set during previous crises. In Malaysia, our economic stimulus in 2020 totalled about 21% of GDP versus 9.4% in 2008/09 (global financial crisis or GFC) and 2.5% in 1997/98 (Asian financial crisis). Globally, we also saw 1) major central banks undertake significant quantitative easing (QE), buying assets at five times the size of the record set in the GFC (April 2009); and 2) the rise of QE’s less orthodox sibling (both are generally perceived as “printing money”): the Modern Monetary Theory (MMT) approach.

MMT, in short, argues that countries (such as the US) with monetary sovereignty (using and borrowing largely in local currencies) can “spend what it takes”, unconstrained by ideas of fiscal deficits and higher debt. MMT offers a more direct approach versus QE: Central banks buy government bonds directly from the government. There are debates on MMT causing hyperinflation or stagflation, but we are more interested in the potential investment implications (for example, US dollar, bond investing, commodities), if MMT does take hold as a mainstream policy.


With aggressive stimulus pushing risk-free rates in many countries to historical lows, many investors, faced with “there-is-no-alternative” (TINA), had to move away from bank deposits towards growth assets (equities) to seek better returns. Fear-of-missing-out (FOMO) kicked in too, with a wave of new (younger) retail investors spurred by the loan moratorium and work-from-home arrangements. Retail participation on Bursa Malaysia climbed from under 30% to a peak in August. It stayed at 40% levels through November, despite the loan moratorium expiry. Malaysia’s M1 money supply has had six consecutive months (May to October) of double-digit growth, with October’s 19.2% year-on-year growth being the highest since 2008. This flush of liquidity has supported the exuberance in equity markets.

During the earlier days of the pandemic, one may recall clearer skies and fresher air. Covid-19 has reminded us that nature, beyond personal pleasure, is critical to sustaining the global economy as climate change looms as a threat to humanity. At Singular Asset Management, we are heartened by the encouraging progress made on ESG (environmental, social and governance) in 2020, aligning with our team’s long-held belief of “¾ý×Ó°®²Æ£¬È¡Ö®ÓеÀ” (Chinese proverb: A gentleman loves fortune and earns it in a proper way).

Major countries have set bold targets, deploying resources towards low-carbon investments, while some have applied “green policies” to their economic recovery responses. As a signatory of the United Nations-backed Principle for Responsible Investment (UNPRI), we look forward to, and will continue to help foster, a better understanding of ESG among stakeholders in 2021.

The beginning of the end of the pandemic?

On Nov 9, the Pfizer vaccine update was viewed by many as the beginning of the end of the pandemic. It sparked a major rally in global equity markets, the biggest sell-off in the 10-year US Treasury since mid-March, and was heralded as one of the biggest single day rotation globally out of the leaders (healthcare, technology) into beaten-down cyclicals. In short, it was a rapid and intense “dash for trash”.

Heading into 2021, markets may look forward to optimistic vaccine news flows being the key to lift business and consumer confidence — pricing in knock-on effects on domestic demand and corporate earnings of “back-to-normal” trades. Vaccination in high-income nations may pave the way for international flights to resume, spurring recovery in travel and spending. Additional successful vaccine candidates may lift global vaccine capacity, benefiting more emerging countries. With ample liquidity and structurally low interest rates, the stage is set for a party — at least until the music stops.

There are many unknowns at the back of our minds: the timing of mass inoculation (to achieve herd immunity); longevity of vaccine immunity; and inherent logistical challenges in the distribution and administration of a vaccine. The full normalisation of economic activity may be a multi-year process for many emerging markets, including Malaysia. Fiscal stimulus (such as a loan moratorium, cash handouts and debt-guarantee programmes) after their different expiry dates may cease as the pandemic becomes more manageable — after which, one will have to grapple with underlying economic reality, which will feed through into revisions of analysts’ profit estimates in 2021. Ultimately, investors will need to see whether earnings are delivered.

Stay close to the ground

Having conducted more than 900 meetings in 2020 with our network of listed and unlisted companies, our team at Singular Asset Management has uncovered many positive surprises this year with the help of the multitude of management outlooks. As the recovery path ahead remains uneven, stock-picking will remain the norm for the local market. For 2021, stay close to the ground, keep your eyes wide open and your ears peeled, and start kicking the tyres en route to a profitable new year ahead!

Ami Moris


Maybank Kim Eng Group

Look out, 2021, we are ready!

They say hindsight is 20/20 and as we close out a year that has been the most tumultuous in generations, there isn’t much left to say that hasn’t already been said many, many times over. So, let’s talk about moving forward.

A new halo of responsibility

If the last four years were overshadowed by Brexit and Trumpism, 2021 should be a watershed.

With a Joe Biden administration taking the reins in the US, and Europe and the UK looking like they will reach a Brexit agreement, all the signs are there that 2021 will usher in not only a post-Covid-19 emerging market surge, but also a new era of responsibility and integrity towards the causes that matter beyond the financials.

2021 may likely be defined by preparations for COP26 (UN Climate Change Conference of the Parties), to be held in November in Glasgow, Scotland.

Generally aligned and principled global leaders, a goldilocks scenario of continuing fiscal stimulus and accommodative monetary policy, combined with global citizens and corporates that are looking to take action with their wallets, creates the right climate for emerging markets to make a substantive and transformative impact for sustainable growth.

The ‘S’ needs to drive the ‘E’ and ‘G’

While we have previously given heavier consideration to the “G” of ESG (Environmental, Social and Governance), 2020 has convinced me that in order for us, as capital market leaders, to get sustainability in our marketplace right, we need to first build the “S” in order to make an impact on the “E” and the “G”.

This was never as clear as when I was having to work through deeply human conversations of mortality within the corporate environment.

In that moment, it became very clear that, in our corporate life, our language may indeed be human, but we are not often called upon to articulate the humane.

In a situation where I was profoundly overtaken by grief at the passing of a colleague while conducting a Zoom call, I gained a greater appreciation of how important the social component is in our corporate culture.

The switch from corporate speak to raw emotion did not come easily. The disconnect was an obstacle between needing to “be humane” in the situation, but not having the language immediately at hand to do so.

Learning how to accept and frame emotion within our corporate speak will help to build more of the “S” into our conversations and actions within our organisations and the world around us.

This, in turn, can move us forward faster and provide more meaningful drives towards the “G” of governance and the “E” of doing the right things for the environment.

Investors, vote with your seat, not your feet

Companies that are yet to fully embrace the ESG movement should take note. The pandemic has impacted every individual on the planet. In some form, whether directly or indirectly, hundreds of millions of those people are investors who wish to live in sustainable communities on a sustainable planet, and will increasingly hold their advisors and fund managers to deliver on those desires.

As citizens, we have the power to make an impact, not just by buying the “sustainable” option, but by actually choosing how we invest. One might call it voting with our Bursa CDS account, by learning how to use our vote during AGMs and choosing to invest in the funds that vote for ESG with their seat and not just their feet. It is easy to exit an investment in a passive financial protest to those that are not being ESG-minded, but it takes fortitude to stay invested and do what is right with our investment rights.

At Maybank Kim Eng, we take a sustainability-first approach to every deal and every investment. It’s not a new-wave realisation. Humanising financial services has been our mission for the past decade.

2021 is the year we will celebrate our 10th anniversary. We grew in parallel — Kim Eng since 1972 and Maybank Investment Bank since 1973 — and joined forces to build Asean’s most comprehensive regional footprint in 2011.

Our next decade begins with renewed optimism that we are entering a kinder, more progressive era, in which we can feel inspired to make a larger difference by being innovative, audacious and, most importantly, human.

Happy New Year. I, for one, am ready.

Ami Moris’ mission at Maybank Kim Eng Group, the investment banking arm of Maybank Group, is to humanise financial services by helping clients build more profitable and sustainable businesses that help deliver a more equitable and inclusive Asean.

Alan Tan

Chief economist

Affin Hwang Capital

Cautious but optimistic growth outlook

The International Monetary Fund (IMF), in its October issue of the World Economic Outlook, anticipates global GDP growth to rebound by 5.2% year on year in 2021, following a sharp contraction of 4.4% estimated for 2020 (+2.8% in 2019).

Despite an expected turnaround in global GDP growth, both IMF and the Organisation for Economic Co-operation and Development caution that there are still uncertainties and downside risks for growth in 2021, especially with the potential of new cases increasing widely or if there are challenges in the development and deployment of a vaccine.

We believe the downside risks to 2021 would be less influenced by trade tensions between the US and China, and incoming US president Joe Biden has promised to strengthen trade relations with its allies. With mounting domestic issues at hand, especially with concerns about the pandemic as well as further stimulus measures, we do not anticipate Biden will place additional pressure on China for a trade deal in the near to medium term.

As China’s economic growth is anticipated to continue into 2021, we believe its demand for Asean exports will remain healthy, which will support growth in the region, including Malaysia. Furthermore, all Asean-5 countries recently signed the Regional Comprehensive Economic Partnership (RCEP) agreement, whose policy initiatives are to promote trade by reducing or removing tariffs among members.

On the domestic economic front, against this backdrop of the external environment, there remain signs for the domestic economy to record a stronger positive growth in 2021 (owing partly to base effects), supported by coordinated efforts by almost every government around the world to implement economic stimulus packages, as well as global central banks adopting ultra-easy monetary policies with the easing of containment measures (as in the case in Malaysia).

The contraction in Malaysia’s real GDP growth narrowed to -2.7% y-o-y in 3Q2020, after the sharp decline of 17.1% in 2Q2020, and economic growth looks likely to register a smaller decline in 4Q2020, owing mainly to further improvement in domestic demand. The sharp economic contraction in 2Q2020 reflected the enforcement of the restrictive Movement Control Order (MCO) from March 18 until May 3, when only essential services were allowed to operate with very limited capacity. In May, the government decided to reopen the economy in a controlled manner by announcing the enforcement of the Conditional MCO (CMCO) from May 4 to June 9. Businesses were allowed to operate, subject to less stringent standard operating procedures.

Based on monthly GDP growth estimates by the Department of Statistics Malaysia, the country’s real GDP growth contracted 28.6% y-o-y in April during the MCO period, dipped 19.5% in May during the CMCO, and posted a smaller decline of 3.2% in June during the Recovery MCO. As for 3Q2020, monthly GDP growth figures showed improving performance from -2.7% y-o-y in July to -1.6% in September.

The introduction of government measures in Budget 2021, as well as tax incentives and measures of the Targeted Wage Subsidy Programme, are likely to support private consumption growth. Supportive of domestic demand, the government has given tax allowances and other incentives to increase disposable income.

Growth in private investment is likely to improve next year with the resumption and implementation of mega infrastructure and other new projects. We believe the government’s move to promote the digital economy and Industry 4.0 will provide some support in boosting private investment through funds and tax incentives, and promoting high-value-added activities in the electrical and electronics (E&E) industry.

We believe, however, that downside risk remains, on possible lower growth in private investment, as this is highly correlated with uncertain external conditions. When foreign investors face similar challenges from Covid-19 outbreaks in their home countries, their investments risk delay or postponement in implementation. This also explains the government’s proposal to allocate RM69 billion to development expenditure, focusing on construction-related and infrastructure projects with a high multiplier impact to support the domestic economy, as well as prioritised to be carried out, in supporting the country’s total investment growth in 2021. We believe the allocation of RM69 billion for development expenditure will add about two percentage points to GDP growth in 2021, with a higher multiplier impact on the economy, especially in construction activity.

Going into 2021, we believe the next phase of Malaysia’s economic growth will depend on global growth, which has been challenging in 2020, owing to the uncertain economic environment stemming from the pandemic and uneven growth momentum across major countries.

We anticipate exports growth in 2021 to be underpinned by a sustained pick-up in external demand, led by a rebound in global economic growth. In addition, higher projected global semiconductor sales by the World Semiconductor Trade Statistics will also support demand for Malaysia’s E&E exports.

We are maintaining our full-year growth forecast of a contraction of 5% y-o-y in 2020, lower than the Treasury’s official projection of -4.5% (+4.3% in 2019). For full-year 2021, we expect real GDP growth to turn around and expand by 6%, lower than the official forecast of between 6.5% and 7.5%.

In line with our cautious optimistic outlook on trade in 2021, underpinned by improving external demand, the country’s current account surplus is anticipated to remain in surplus (albeit narrower than 2020). Malaysia’s healthy economic fundamentals, alongside an expected turnaround in economic growth and a sustained current account surplus, are likely to help weather the risk of capital outflows and greater volatility. There remain downside risks, however, especially if the number of coronavirus cases continues to rise in other countries, while lower tourist arrivals and receipts in the near to medium term are likely to add pressure to the current account balance. We expect the current account surplus to narrow slightly to 3.4% of GDP in 2021, from a surplus of 3.6% in 2020.

Given the ongoing uncertainty on the global economic outlook (owing to the possibility of a resurgence of Covid-19 cases), especially on external demand next year, we believe Bank Negara Malaysia will maintain an accommodative monetary policy by keeping its overnight policy rate unchanged at 1.75% to further support domestic demand.

We have confidence that the current account surplus will continue to be a feature of economic fundamentals, supported partly by healthy domestic demand and better global growth prospects next year. As domestic borrowings will still be the main source of deficit funding (99.98% of total gross borrowings estimated in 2020), we foresee that this will also minimise foreign exchange risk exposure, given ample liquidity in the domestic system. We expect the ringgit to hover around RM4.10 to the US dollar by end-2020, and RM4.20 by end-2021 (from the current RM4.07 to the US dollar.)

Ray Choy

Regional Head of Treasury & Markets Research at CIMB’s Treasury & Markets division

Aligning the stars in financial markets

2020 was indeed a historic year as the financial markets grappled with recessions and the global pandemic. I prefer the word “pandemic” because it explains the generic nature of the problem at hand, rather than confine it to “Covid-19”. In fact, Covid-19 belongs to the family of coronaviruses that causes severe acute respiratory symptoms. Thinking about its origins and generic nature allows us to internalise that Covid-19 is not a one-off despite its unique name, and this is important because it informs us that the coronavirus is both ancient and persistent. We may very well have to deal with mutations of the virus, hence the likelihood of Covid-20, Covid-21 and Covid-n in the future. Taking another step back, the coronavirus belongs to the broader issue of force majeure, which affects financial markets. Being force majeure, such events cannot be possibly predicted, but it does explain the need for preparedness and policy buffers.

Having cut interest rates aggressively in 2020, central banks are often seen to have limited policy manoeuvrability in case the situation heads south again. Similarly, massive fiscal stimulus enacted in 2020 also leaves economies limited room for further government spending in the event countercyclical policies have to be called into action. In the advanced economies, the fiscal balance, on aggregate, is expected to improve from -14% of GDP in 2020 to -7% in 2021. Gross net government debt is, however, expected to remain at around 124% in both 2020 and 2021. In emerging and developing Asia, the fiscal balance is expected to improve at a slower pace, from 9.5% of GDP in 2020 to 9.0% of GDP in 2021. Gross debt to GDP is expected to rise from 63% to 67% between 2020 and 2021. Of note, the slower narrowing of the fiscal deficit for developing Asian economies implies that fiscal spending due to the pandemic has been spread out more evenly across 2020 and 2021, as compared to the advanced economies where governments spent more in 2020. Analysing these together explains that developing Asian economies, compared with developed economies, continue to have better availability of fiscal space and persistent expansionary fiscal policies going forward in 2021.

With regard to monetary policy, the ongoing concern remains that with many nations approaching at, or under zero interest rate policy, it is difficult for central banks to enact expansionary policy. However, central banks have been particularly innovative and have been willing to reinvent standard settings in policy construction. While some traditionalists have labelled this as dangerous experimentation, I believe it is inevitable for central banks to adopt a comprehensive view of different policy frameworks as well as philosophical approaches, whether orthodox or heterodox, Monetarist or Keynesian. Therefore, whether policy options are available is a function of mindset, and there has been evidence of constructively evolving policy variants in the forms of: (i) active financial market intervention by central banks; (ii) the consideration of negative interest rate policy; and (iii) flexibilities in prudential regulations. The arguments for and against these are beyond the scope and space of this article, but monetary policy options are not limited to mere changes in interest rates and, therefore, there is little reason to be overly doubtful of central banks’ available policy tools in the event countercyclical measures are needed. Furthermore, the backdrop for increasingly easy monetary policy is possible as inflation has remained low and even if it were to rise, would not lead to a sharp rise in inflation as global excess capacity and productivity remains high.

Kuala Lumpur skyline ... Developing Asian economies, compared with developed economies, continue to have better availability of fiscal space and persistent expansionary fiscal policies going forward in 2021 (Photo by Cheryl Loh/The edge

The international political economy in 2021 is expected to unfold quite constructively, benefitting trade balances of exporting nations. The new US president will benefit from re-building global trade pacts following the insular economic nationalism promoted by Trump’s administration, and this might not be hard to achieve since the bar has been set low. The improvement in trade relations is therefore two-fold, one originating from a change of US president, and the other from structural pressures caused by the movement towards economic regionalism.

The value of the Regional Comprehensive Economic Partnership (RCEP) is not merely positive to its internal members in Asia through the reduction of tariffs, but structurally important to encourage regional growth and provide a stronger platform for political voices as the East and West continue to negotiate on trade terms. This bi-polarity and regional nationalism is not only a consequence of Trump’s foreign policies during his term, but perhaps, a natural result of the increasing economic dominance of China, and the rise in nationalism as a consequence of disenfranchisement given rising to income inequality.

The environment of stronger growth due to a recovery from the pandemic, creative destruction in the global economy, and government-assisted growth through expansionary policies will translate to risk-seeking behaviour in 2021. At the same time, liquidity creation through low interest rates, and pent up savings due to risk aversion, will support further inflows into financial markets assets. In this environment, it is likely that riskier markets such as equities, cyclical commodities and emerging markets currencies will outperform other asset classes. For bonds, high-yield bonds and lower-rated markets will benefit as they have stronger return profiles in a time when risk is of less concern during 2021, where recovery will remain the major theme. Asian bonds are attractive, given lower sovereign credit risk profiles due to the availability of fiscal space and, at the same time, these markets have above-average yields against developed markets, where most are offering near zero or even negative yields.

Against the baseline scenario for a brighter outlook, the key risk to the financial markets in 2021 will unlikely stem from poor growth or economic issues but, rather, the manner in which global relations, economies and societies are managed. Barring another force majeure event, it would be important to monitor the new US president’s handling of trade relations with China and the rest of the world, Middle East Policy and the markets’ reaction to absorbing additional bond supply as savings are transformed into government spending programmes. Fiscal programmes are good, but execution remains key and testy government-electorate relations worldwide continue to eye the equitability, effectiveness and efficiency of government stimulus. Another risk would be vaccine nationalism and its implementation, and whether that — together with the risk of a resurgence of the virus — could stymie the fragile recovery and market sentiment.

Dr Ray Choy is regional head of treasury and markets research at CIMB’s Treasury & Markets division, covering fixed income, currencies and commodities markets. The views expressed in this article are entirely his own and do not necessarily reflect the views of the CIMB Group or its subsidiaries.


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