This article first appeared in Capital, The Edge Malaysia Weekly on March 1, 2021 - March 7, 2021

GLOBAL equity markets kicked off 2021 on a positive note, underpinned by the technology-led rally. US markets, in particular, soared to record highs, prompting the Bank of America to warn against the technology mania fuelling the “mother of all asset bubbles”.

Although the earnings of global listed companies fell 15% in 2020, the MSCI World benchmark was up 18%, while the Nasdaq Composite Index surged 51%, according to Citigroup chief global equity strategist Robert Buckland.

Apart from equities, prices of commodities and alternative asset classes such as bitcoin have also been rising. However, market observers dismiss the asset bubble claim.

“I have not seen any indication of a bubble. There will only be a bubble when all assets are being pushed to their all-time highs,” Areca Capital Sdn Bhd CEO Danny Wong tells The Edge.

That said, he acknowledges that asset prices tend to be volatile when there is too much liquidity, which is the biggest risk in the current environment.

“The market will fluctuate in the short term. This is the function of demand and supply as well as liquidity, regardless of asset classes,” he says.

In the event of a sizeable pullback in the global equity markets, he says, it won’t affect the long-term upward trend. “We are here for the long term. If there is a serious correction, we will buy more,” Wong adds.

At home, the benchmark FBM KLCI is currently trading at a price-earnings (PE) ratio of 16 times. MIDF Amanah Investment Bank Bhd research head Imran Yassin Yusof sees the current level as reasonable.

“The valuation is not elevated. Even if there might be an adjustment to earnings after this results season, the valuation is just about 17 times,” he says.

Imran sees the overall market trajectory this year to be on an upward trend, as the economy is improving. “Of course, along the way from now till the end of the year, if there is any correction in the US markets, we can expect a spillover effect as well. Our advice this year is to buy on weakness. Any pullback or correction will be a good opportunity for investors, especially stocks with good fundamentals.”

The local market appears to have entered a consolidation mode following the toppish valuation fuelled by liquidity.

Since early this year, the benchmark index has skidded 45.67 points or 2.8% to close at 1,581.54 points last Thursday.

“Certainly, there is a risk of valuations reaching very high levels. That’s why we are seeing more hesitation. Lower-liner stocks are also seeing a hint of consolidation as they are very expensive,” says Inter-Pacific Securities head of research Victor Wan.

Although earnings growth for the FBM KLCI component stocks looks good, he says the bulk of it has been driven by the rubber glove companies, which have enjoyed a surge in glove demand owing to the Covid-19 pandemic.

“Excluding the rubber glove stocks, you will find that the broader market performance is not that strong. While earnings are expected to improve this year, share prices are generally fairly valued. For rubber glove stocks, demand may taper off as the results seem to show that inoculation is very effective,” he explains.

Buoyed by the structural change accelerated by the pandemic, technology stocks will remain on investors’ radar despite their rich valuations. Wan expects the recent pullback in technology stocks to be short-lived, with greater upside potential than downside.

“A lot of them are riding the chip shortages, so the technology sector will remain fairly firm and the pullback will be very shallow,” he says.

Imran believes it is a good time to pick up technology stocks that have reported better-than-expected results.

In evaluating technology stocks, Wong opines that investors should look at their two- to three-year forward PE ratios, or even more advanced methods like PE-to-growth ratios.

“You cannot just use trailing PE for high-growth sectors. All developments are pointing to higher demand for semiconductor products. There has been a structural change in the technology sector from 4G to 5G and even 6G.

“High share prices do not mean high valuations. We are talking about multiple growth, not small-percentage growth. Not only your top line but also the margin. Therefore, their bottom line could jump more than the top line,” Wong says.

While glove stocks have come under pressure owing to the rollout of the vaccination programme, Imran says it is premature to write them off as glove demand is expected to remain strong, in addition to rising average selling prices quarter on quarter.

“Demand for gloves won’t fall off a cliff even with vaccination. Demand may only normalise next year, so there is still some room for glove stocks.”

Looking at the vaccination progress, Wan is of the view that the recovery play will be very much supported by the possible reopening of air travel by the second half of the year, which will help the aviation and tourism sectors.

“With money flowing in, the prospect of recovery will be firmer in the months ahead. There is a strong chance of inflation. We need some inflation hedge,” he says.

Under the recovery theme, Imran recommends automotive, banking and construction stocks. He has maintained the 2021 FBM KLCI year-end target at 1,700 points.

Meanwhile, Wan has set a year-end target of 1,720 to 1,750 points, based on potential earnings recovery.

“Right now, we are in consolidation mode, but the downside risk has more or less evaporated given the expectation of earnings growth,” he says.

The rally in the tech-heavy Nasdaq seems to have cooled — the index fell 2% over the past week, closing on Wednesday at 13,597.97 points.

Note that 10-year US Treasury yield rose to a one-year high of 1.36% last week on inflation concerns, which could dim the attractiveness of riskier assets such as equities. However, this may not be the case for now.

“Ordinarily, you would expect bond yields to fall when stock prices are expensive because investors will move to the bond market. But right now, the relationship is complex. The focus is still very much on equities for the time being owing to ample liquidity,” Wan explains.

Despite that, he thinks the US markets may need to consolidate as it is difficult for share prices to go up further owing to their lofty valuations.

Imran says higher bond yields are a reflection of market confidence in the economic recovery. “With flush liquidity and certainty in the economy, people are putting money into the stock market rather than the bond market.”

Given the aforementioned catalysts and relatively low downside risk, will foreign funds come back to the local bourse this year after recording net outflows in the past years?

According to MIDF, net selling of local equities by foreign investors amounted to RM24.75 billion in 2020, much higher than the RM11.14 billion in 2019.

“We are still expecting the return of foreign funds. Last year, the outflow was quite constant. There were only two weeks of net inflow.

“However, we have seen much better performance in terms of foreign funds this year. The current valuation level could entice the foreigners to come back to our market,” says Imran, noting that the strengthening of the ringgit would be another plus point. Year to date, the local currency has depreciated by 0.53% against the greenback.

Wong agrees, saying that developing economies, including Malaysia, will stir foreign investors’ interest again given the better growth prospects here. “The money will flow to where they think is fantastic, and Asia is the answer for foreign funds, as we can still maintain an average growth of 4% to 5%. Even a small spillover to Malaysia is good enough.”

Nonetheless, Wan points out that the local political situation — seen as the key risk — will be closely monitored by foreign funds.

Malaysia continued to record higher foreign portfolio inflows at the start of 2021, mainly into domestic bonds, mirroring the trend of higher portfolio flows entering emerging market bonds, according to UOB Research’s Feb 9 note.

Overall net foreign inflows totalled RM2.8 billion in January (December: +RM3 billion), with bond inflows of RM3.7 billion (December: +RM3.6 billion) while equities saw a net outflow of RM800 million (Dec: -RM600 million).

Despite domestic challenges, Inter-Pacific Securities believes Malaysian government bonds will remain attractive as capital flows into emerging markets remain strong given low global interest rates and high market liquidity, which boost positive carry-trades.

However, foreigners remained net sellers of local equities, with their ownership at a record low of 20.7% in January against 22.4% a year ago.

In contrast, the year-to-date net buy position for retail investors rose to RM2.8 billion for the week ended Feb 19. They were buying technology, financial and healthcare stocks, CGS-CIMB Research says in a Feb 23 note.

Wong is optimistic that the high retail participation of more than 40% on Bursa Malaysia will create a healthier investing ecosystem.

“There is a misconception of retailers simply buying shares, but nowadays they are more informed than before. With low interest rates and better information flows, the market has become more mature. Reallocating money from fixed deposits to fund corporates will help the economy, and it is a good cycle. Of course, we don’t encourage people to do short-term trading,” he says.

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