This article first appeared in The Edge Malaysia Weekly on March 16, 2020 - March 22, 2020

IT never rains but it pours. The local stock market has been hit by multiple whammies.

On the home front, the lingering political uncertainties have dampened market sentiment. On top of that, are the external shocks, namely the Covid-19 pandemic that is expected to strain the global economy and the unexpected oil price war started by Saudi Arabia.

The recent heavy selldown pulled share prices even lower after last year’s lacklustre performance. Broking houses have started making margin calls as share prices spiral downward.

For investors who have been on the sidelines, equity strategists believe the time is ripe for some bargain hunting but one needs to be selective when picking stocks, given that there are many variables in the equation at this juncture.

The FBM KLCI has slid 15.36% year to date to close at 1,344.75 points last Friday — the lowest since September 2011. The benchmark index has fallen 20.46% since January last year.

The selling on the broader market was even heavier given that the Bursa Malaysia Small Cap Index was down by 28.67% YTD to close at 10,103.74 points last Friday. This is the lowest since May 2010. Likewise, the index has declined 10.58% over the past 14 months.

“Despite the enhanced market volatility, not all is dark and gloomy as Affin Hwang Capital continues to advocate a defensive stance, favouring the Malaysian real estate investment trusts (MREITs) and healthcare sectors,” says Affin Hwang Investment Bank Bhd deputy group managing director Yip Kit Weng.

Other sectors that Affin Hwang IB has an “overweight” rating on are rubber gloves, plantations and electronics manufacturing services, Yip adds.

In respect of the oil and gas sector, especially after the oil price crash last Monday, Yip believes Dialog Group Bhd will be a prime beneficiary, given that the low oil price environment should see higher demand for storage space.

“In addition, we believe Serba Dinamik Holdings Bhd could benefit from higher maintenance demand in the Middle East as production ramps up,” he says, adding that its order book target of RM15 billion by end-2020 remains intact from crucial maintenance work and the Pengerang Integrated Complex in Johor starting up.

Yip says the “buy” calls remain on Velesto Energy Bhd, Bumi Armada Bhd and Kelington Group Bhd, noting that Petronas Chemicals Group Bhd has been added to its “buy” list given the recent share price drop, which now offers a 4.5% yield.

“While we project 2020 KLCI earnings per share growth of 1.3%, there is likely a downside risk to this considering the collapse in oil prices and negative impact from Covid-19, including supply chain disruptions and weaker demand,” says Yip.

Moreover, Affin Hwang IB continues to expect some potential outflows to arise from downside risks due to uncertainties around Malaysia’s economic growth prospects due to the impact from Covid-19.

Thus, inflows into the Malaysian market are expected to be limited in the near term, especially if the spread of the coronavirus outside China is getting rampant, he adds.

TA Securities Holdings Bhd head of research Kaladher Govindan says investors have to nibble selectively “as [one] can never predict the bottom”.

The downside risk, he notes, is that the local bourse is still trading at a premium valuation compared with its regional peers. And that would mean foreign selling has yet to subside.

“With downside pressure from oil prices, investors should remain defensive with exposure to yield play, exporters and undervalued picks,” says Kaladher.

While the Covid-19 pandemic remains the main concern for the market, Hong Leong Investment Bank Bhd (HLIB) head of research Jeremy Goh says investors could sigh in relief for the time being as the recent political fiasco in the country — one of the three whammies that caused the market selldown — appears to have subsided.

From the valuation perspective, Goh notes that the KLCI looks quite attractive now with its current price-earnings ratio level of around 14 to 15 times, compared with the historical average.

Goh continues to like rubber glove counters, but on a selective basis. “For us, our pick would be Top Glove Corp Bhd as Covid-19 will continue to spur demand,” he adds.

With the dovish environment, it is no surprise that HLIB would also be looking at Malaysian REITs. “While there are some downsides for the retail-based REITs as footfall in malls will start to drop, we must also bear in mind that the overnight policy rate is being reduced quite a fair bit. We have [had] two cuts this year and potentially are looking for one more cut in May,” says Goh.

However, the research house would still avoid tourism-related stocks such as aviation and Genting Bhd, despite share prices falling by a lot. “We have yet to see the first batch of results, and that will only be reported in May. So, without those numbers, it is quite hard to gauge how bad the impact is,” says Goh.

Likewise, MIDF Research senior analyst Imran Yusof says investors would need to select potential stocks that have solid fundamentals. “This should be paired with stocks that give very attractive dividend yields which should moderate any downside risk.”

Defensive sectors such as utilities and consumer staples should also be considered, he notes.

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