This article first appeared in The Edge Malaysia Weekly on March 15, 2021 - March 21, 2021

IT has been a year since the first Movement Control Order (MCO) was imposed on the country and the global equity market rout that saw the FBM KLCI lose 20% in just a month.

On March 19, 2020, the benchmark index tumbled to a low of 1,219.72 points after a sell-off triggered by the oil price slump and concerns about the impact of the Covid-19 pandemic on economies around the world. The ramifications appeared so dire that West Texas Intermediate crude plunged into negative territory to -US$37.63 per barrel while Brent crude fell to about US$20 a barrel.

For many new retail investors, the market decline wasn’t necessarily a bad thing. Unlike previous financial crises, it took a much shorter period of time for the global markets to recover from their losses.

Since the first MCO on March 18, 2020, the FBM KLCI has risen 29.7%, driven by ample market liquidity, a loan moratorium, work-from-home arrangements and low interest rates, which Bank Negara Malaysia’s monetary policy committee has kept at a record low of 1.75%.

Despite the recent pullback, the Bursa Malaysia Technology Index has been the star performer of the past year, gaining 176.3% mainly on the back of a shortage of chips in the semiconductor industry. Over the same period, the Healthcare Index jumped 156.4% despite a recent sharp fall in the share prices of glove stocks, owing to the rollout of Covid-19 vaccination programmes around the world.

With Brent crude surging past US$70 a barrel on March 8 — the first time in more than a year — following reports of attacks on Saudi Arabian facilities, the Energy Index has posted a strong rebound of 64.1% year on year.

As investors pin their hopes on an economic recovery, banking and consumer stocks are back in fashion. The Financial Services Index and Consumer Products & Services Index have risen 34.8% and 32.2% respectively over the past year.

Not to be left out, the FBM ACE Market Index and Small Cap Index have continued to outperform, gaining 188.3% and 91% over the same period on the back of strong retail participation, which pushed trading volume to an all-time high of 27.8 billion shares on Aug 11 last year. The frenzy was mostly driven by penny stock transactions.

Retail participation remained high in January and February this year at 38% and 39%, after peaking at 44% in August 2020. According to Bursa’s statistics, local retailers accounted for 44.95% of the 168.5 billion shares traded in February, slightly lower than the 45.6% of the 131.2 billion shares traded in January.

In a March 2 note, CGS-CIMB Research said retail investors’ net buying momentum grew 35% week on week to RM947.5 million in the last week of February, the highest net buying flows for the segment since the week of July 24, 2020. This boosted the year-to-date net buying position to RM3.8 billion.

Foreign participation increased to 16% last month from a low of 12% in August last year, while local institutional participation hovered between 44% and 47% during that period. Foreign investors net sold RM867 million worth of Malaysian equities last month, 4% higher than the RM834.5 million in January. As a result, cumulative net foreign outflows since 2010 rose to RM35.1 billion.

JF Apex Securities head of research Lee Chung Cheng says rotational plays on Bursa will continue, with the broader market likely to trade sideways. “I think the rotational plays will go on for a while to reopening laggard plays such as banking and energy stocks. But there will be profit-taking and bargain-hunting in technology stocks.”

He believes the market momentum will persist, partly underpinned by strong retailer interest. “The market trading volume will definitely be higher than pre-pandemic levels.”

Although the valuations of glove stocks have become more attractive, Lee foresees their share prices hovering at current levels because the market no longer expects super profits. “With all the newcomers coming on board, investors are wondering what will happen in terms of average selling prices in the second half of the year.”

Rakuten Trade head of research Kenny Yee stresses that next year will be quite crucial for the glove sector. “If there is a full economic recovery, then the demand for gloves will not be that robust. I would not say glove stocks are trading at attractive levels right now because there is still volatility in their share prices. Their valuations only look attractive when compared with their peaks last year.”

With the recovery theme taking shape, he is of the view that impacted industries such as aviation and tourism could see a sharp rebound in the second half of the year.

Lee recommends that investors look at stocks that will benefit from the reopening theme as the national immunisation programme has commenced. While there is a risk that global markets may see a correction due to the premium valuations of stocks in the US, South Korea and Taiwan, he notes that a relatively low foreign shareholding in the local market could help mitigate any potential sell-off.

Lee’s year-end target for the FBM KLCI is 1,680 points, which is an upside of only 3.1% compared with last Thursday’s close of 1,629.41 points. “I don’t think the market will be as strong as last year, which was due to the low base effect as a result of the slump in March.”

Kenanga Research head Koh Huat Soon believes that the local market will still be turbulent in the first half of the year as better clarity will only emerge in the second half, which will benefit banking, oil and gas and construction players. “Growth will definitely be there. The only risk for banking stocks is the write-offs and impairments. But I think the banks can absorb these, so it shouldn’t be a problem.”

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