This article first appeared in The Edge Financial Daily, on February 15, 2016.
KUALA LUMPUR: Global equities, which have been buffeted by concerns about the slowing growth in China, patchy recovery in the United States and Europe, plus the cheap oil, have turned bearish. This is manifested in the continued selling pressure since the start of 2016.
Malaysia has not been spared from this beat-down. The benchmark FBM KLCI declined 13.12% from its peak of 1,892.65 points in July 2014. The fall on the FBM Small Cap Index, which encompasses the top 98% of Main Market counters minus the 100 biggest companies, is even steeper, down 23% to 14,886.8 points last Friday.
With stocks trading at multi-year lows or below net asset values, should this be the time for investors to be greedy? As billionaire investor Warren Buffet’s well-known quote says, “Be fearful when others are greedy and greedy when others are fearful.”
Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng said now is the time to be really disciplined in studying companies’ fundamentals and patient during the downturn.
“The problem is instead of ‘buy low, sell high’, people tend to ‘buy high, sell higher,’” said the fund manager who expects the local market to be volatile.
“It’s quite unlikely that foreigners will come back to Malaysia anytime soon because of the volatility in the US. Investors must be prepared to enter this volatility, as there are up-cycles and down-cycles in markets.”
The upside, if judging by how much a battered stock could recover to its recent high, is getting more appealing than the yields offered by certain dividend stocks. Even export-oriented companies, whose shares saw multiplication in value over the past two years, faced selling pressure of late as the ringgit stood its ground against the US dollar recently, in addition to the expectation of high base effect on their earnings in 2016.
Top Glove Corp Bhd, the world’s biggest glove maker for example, fell 20% to RM5.62 last Friday from its highest closing of RM6.95 on Jan 19. Meanwhile, the world’s largest condom maker Karex Bhd slid 22.3% from its historical high of RM4.70 last month to RM3.65 last Friday.
Furniture maker Poh Huat Resources Bhd’s share price dived 28% from its peak of RM2.10 in late December to RM1.51 last Friday.
M&A Securities Sdn Bhd head of research Rosnani Rasul is one of those advocating to take the leap of faith. She told The Edge Financial Daily that she is high on two sectors: construction and oil and gas (O&G) — a sector that investors have shied away from since the crude oil prices dipped below US$100 (RM415) in the fourth quarter of 2014.
The construction sector is in favour mainly due to the anticipation of major infrastructure projects. But the O&G sector could be a wild card as crude oil prices are struggling to stay above US$30 per barrel as most oil-producing nations are reluctant on production cuts.
“Remember, we don’t invest for the short term. [The] expensive view is based on a short-term outlook. In the long term, O&G is very attractive,” she said.
With a long-term view, Rosnani pointed out that crude oil was also trading below US$30 a barrel seven years ago. But eventually prices climbed to the US$100-level and stayed that way for several years, she said.
“Go long on O&G stocks and go play golf. Look back at your investment two years from now, you will make very good gains.”
Ang is not as favourable towards O&G counters. “There is a reason why a lot of them are trading below book values, the sector’s outlook has now changed.”
AllianceDBS Research Sdn Bhd head of Malaysia research Bernard Ching opines that analysts will begin to use an asset-based relative valuation method for companies that suffer significant earnings fall during down-cycles.
“But this is still not a perfect solution as assets carried at book value may need to be impaired first to reflect prevailing market value or replacement cost. This partly explains why certain stocks trade at discounts to their book values during down-cycles,” he said.
Ching, too, recommends construction stocks, along with utilities for stable earnings and attractive valuation. Another sector he favours is technology, as new technology and product roll-outs could beget demand growth — with his conjecture that the ringgit rebound could not be sustainable lest oil prices are still weak.
“Recent sell-off does present buying opportunity but investors need to be selective. For individual investors, we advise to raise cash level instead of buying defensive counters such as telco and consumer staples, where risk-reward is not attractive now.”
And selective they have to be indeed. Even technology stocks could be susceptible to a slowdown; semiconductor sales were flat at US$335.2 billion in 2015 as the fall in the second half cancelled out any increase in the earlier part of the year, according to Semiconductor Industry Association (SIA).
Nonetheless, SIA projected a “modest growth” this year despite softening demand and the strong US dollar.
