Growth stocks are way down. Is it time to go defensive?

This article first appeared in Capital, The Edge Malaysia Weekly, on June 6, 2022 - June 12, 2022.
Growth stocks are way down. Is it time to go defensive?
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THE past two years have seen investors — amid a market flush with liquidity — piling into growth stocks in the rubber glove, semiconductor and healthcare industries following exponential demand growth due to the Covid-19 pandemic.

On the flip side, defensive stocks, which provide stable dividends and earnings, have taken a back seat as investors seem more interested in thematic plays against the background of the pandemic and global supply-chain issues.

The business environment has changed since then, with central banks around the world in a race to raise interest rates to tame high inflation. Bank Negara Malaysia was no exception as it raised the overnight policy rate by 25 basis points to 2% last month. And stocks that were once the darlings of investors have seen sharp corrections in recent months, with analysts predicting that investors could make the switch and start buying defensive stocks.

The rubber glove sector was one of the top plays during the pandemic as global demand for gloves soared. The big four players — Top Glove Corp Bhd, Hartalega Holdings Bhd, Kossan Rubber Industries Bhd and Supermax Corp Bhd — saw their share prices hit multiple new highs during the period.

The glove mania has since cooled, as became apparent towards the end of 2021. Glove counters have witnessed a marked decline in prices from their highs.

Take Hartalega, for example. Its shares have fallen 35% since April 30, 2020, to close at RM4.20 on May 31 this year while Top Glove declined 33% to RM1.40 during the same period.

With the exception of Comfort Glove Bhd’s stock price, which has dropped 51% over the past two years, the other smaller cap glove makers have seen positive share price growth during the period, such as Careplus Group Bhd (up 21%) and Rubberex Corp M Bhd (up 25%).

Technology stocks, which saw a rally up to November 2021, have also taken a beating since the start of the year, with the Bursa Malaysia Technology Index declining 32% to 68.62 points as at May 31 from its peak of 100.86 on Nov 2 last year.

ViTrox Corp Bhd, which peaked at RM11.07 in December 2021, has since fallen 30% to its closing price of RM7.75 million on May 31, while shares of Greatech Technology Bhd, Mi Technovation Bhd and UWC Bhd have also seen significant double-digit percentage declines in their respective prices.

As these growth stocks underwent a rollercoaster ride, stocks in defensive sectors have held steady.

Nestlé (Malaysia) Bhd’s share price, for example, has remained relatively stable around the RM134 to RM135 level since April 30, 2020. Bloomberg data shows the group announcing a total of RM4.74 per share in dividends in 2020 and 2021, translating to a dividend yield of 3.4%.

Shares in KLCCP Stapled Group have also remained largely stable, down by 4.4% over the past two years to close at RM6.85 on May 31. Shareholders were rewarded with 63.6 sen per share in dividends over the two years, equivalent to a yield of 8.1%.

British American Tobacco (Malaysia) Bhd, meanwhile, gained 15% during the same period and paid out RM1.81 per share in dividends over the two years, giving a yield of 14.3%.

Petronas Dagangan Bhd announced a total of RM1.08 per share in dividends over the period, translating to a 5.3% dividend yield. Its stock price has gained 17% from its closing price of RM19.27 on April 30, 2020 to RM22.56 on May 31.

The banking sector, widely regarded as defensive, has seen double-digit appreciation in share prices since April 30, 2020, with Malayan Banking Bhd, Public Bank Bhd, CIMB Group Holdings Bhd and RHB Bank Bhd rising 37%, 54%, 58% and 47% respectively.

Malacca Securities Sdn Bhd head of research Loui Low Ley Yee is recommending that investors go defensive, given the high interest rate environment, although investors need to consider whether these stocks can generate more earnings and higher dividend yields versus inflation.

“For example, the consumer segment ... we need to see whether they can pass on the higher raw material costs to the consumer. There are growth prospects for this segment, which should also benefit from the weak (local) currency,” he tells The Edge.

“Banks are also a good defensive pick, as well as real estate investment trusts (REITs). Investors should look at companies with high net cash that pay good dividends, with visible growth prospects,” he says.

Asked if investors should still consider growth stocks in the current climate, Low says there could be opportunities in the technology sector given the potential rebound after the double-digit share price declines. Investors should keep an eye on sequential earnings growth.

However, he believes the party is over for rubber glove companies, which have been seeing declining earnings.

“It will be difficult for the rubber glove players to see a rebound as average selling prices (ASPs) continue to decline, on top of the cukai makmur (prosperity tax) and higher commodity prices,” Low says.

Areca Capital Sdn Bhd executive director and CEO Danny Wong concurs, pointing out that glove stocks have missed analysts’ earnings expectations in the past two quarters, which indicates further potential downside.

Any recovery in share price for the glove stocks will depend on ASPs bottoming out, he says.

However, he disagrees that investors should go defensive amid the current market conditions, saying this is a good time to look at technology stocks that have seen prices fall but still have strong fundamentals.

“It depends on the investors’ risk profile and investment horizon. If they are holding something for the longer term and are sure of the long-term growth prospects of their investments, then they should hold on.

“Inflation is high currently. Thus, if you move your allocations into defensive dividend stocks, your returns might not even beat the inflation rate. So what’s the point?” says Wong.

Besides the technology sector, Wong is also looking at opportunities in the industrial sector where companies are expanding their operations and diversifying into other geographical locations to ensure their operations can continue elsewhere in the event that any market goes through a lockdown.

While it is a good time to look at growth stocks with strong fundamentals, Wong says investors need to be cautious. “Just because commodity prices are high, it doesn’t mean that investors should go into growth stocks in the oil-and-gas or plantation sectors. The high commodity prices are due to event-driven factors, and would not be sustainable in the long term,” he adds.

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