Friday 29 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly on September 28, 2020 - October 4, 2020

THE possible change of government shook the local market again last week. It is definitely a key risk, but looking beyond that, analysts believe that a massive sell-off is unlikely in the coming quarter as investors await positive news from Budget 2021.

Last Wednesday, PKR president Datuk Seri Anwar Ibrahim dropped a bombshell by claiming that he had garnered “formidable and convincing” support from members of parliament to form a new government to replace the Perikatan Nasional government.

Soon after Anwar’s press conference, Prime Minister Tan Sri Muhyiddin Yassin unveiled the additional packages in the fight against the economic fallout, including the RM7 billion Bantuan Prihatin Nasional 2.0 (BPN 2.0), the RM2.4 billion Wage Subsidy Programme 2.0 and the RM600 million Prihatin Special Grant (GKP) worth RM600 million.

CGS-CIMB Research says in a Sept 24 note that the re-emergence of political instability, just seven months after Muhyiddin took over, following the collapse of the Pakatan Harapan government, will lead to higher volatility in the market with downside risks.

“It would likely only be partially offset by the RM10 billion stimulus package announced by the government. This may lead to foreign selling, owing to concerns over a weaker ringgit, and local investors’ reducing their exposure in the equity market because of concerns over earnings risks,” it says.

The research house believes that sectors least affected by such uncertainties are export-oriented industries (gloves, oil and gas, agriculture, tech and electronics manufacturing services) while sectors most affected by domestic policies are banks, construction and property.

“We keep our FBM KLCI target of 1,520 points and top three picks (Malaysian Pacific Industries Bhd, Public Bank Bhd and Tenaga Nasional Bhd).”

Despite the political drama, HLIB Research head Jeremy Goh sees upside bias for the local bourse in 4Q, underpinned by the positive sentiment from Budget 2021. Other catalysts are the review of the FBM KLCI component stocks, which could see heavier weightage for glove stocks.

“It is quite certain that Supermax Corp Bhd will be included into the index,” he says. “Currently, Top Glove Corp Bhd and Hartalega Holdings Bhd are the two big glove makers on the FBM KLCI, while Kossan Rubber Industries Bhd is also poised to be part of the key index.”

Goh highlights that Covid-19 cases will also be closely monitored. “Right now, it is very well contained, but if it spreads out from the Sabah and Kedah clusters, then it will be the biggest risk.”

Correction presents good opportunity to buy

TA Securities head of research Kaladher Govindan believes any healthy correction should be seen as a good opportunity to accumulate stocks.

“It is a new bull cycle, so I believe this is the corrective wave. Next year, the market will be stronger on the back of the earnings recovery,” he tells The Edge.

Nonetheless, Kaladher says election fears will linger in both the US and Malaysia. He believes the US markets are set to rebound after the presidential election on Nov 3.

“The US presidential election will create some foreign selling. There are also rumours about election locally, and it depends on how the Sabah election pans out on Sept 26. The prime minister has said that there could be an early election if they win in the Sabah election.”

Speaking of Budget 2021, Kaladher expects more contract flows for the construction sector, such as the Mass Rapid Transit 3 and Kuala Lumpur-Singapore High Speed Rail projects.

“But the main concern is the political scenario, as any party that comes in will make amendments or delays to the projects,” he says.

Kaladher recommends that investors take a look at property counters, whose valuations are at cheap levels, with only 0.3 times price-to-book ratio versus 0.8 times in the past five years.

As the economy recovers, he also foresees opportunities in the consumer and gaming sectors as well as aviation stocks such as Malaysia Airports Holdings Bhd.

Kaladher believes small-cap stocks will continue to dominate the market, as retail participation in the stock market is not expected to fade off.

“The market has been driven by retail investors and they still have interest in small-cap stocks. There could be a temporary fall [in retail participation], owing to the end of the loan moratorium measure, but, eventually, retail interest will pick up again.”

Goh says retail participation will still be higher than the average 24% in the past against the peak of more than 40% in June and July.

Nomura Research foresees a gradual decline in retail liquidity beyond October, rather than an abrupt cliff.

Kenanga Research head Koh Huat Soon agrees that small-cap stocks will continue to climb. Note that the FBM Small Cap Index has gained 66.1% since its low in March.

“A lot of technology and construction and a few property counters are in the small-cap space. We still like technology stocks and we are also positive on the construction sector. So, if those sectors run, then the related small-cap stocks will also do quite well,” he says.

In contrast, big-cap stocks are expected to be stagnant, as foreign funds are unlikely to return in a big way.

Nonetheless, Koh says stocks that have been hit hard by the Covid-19 pandemic, such as Genting Bhd, may see a boost if there is positive news on vaccines.

For glove stocks, he believes the use of gloves will remain high because of concerns over the resurgence of Covid-19. “We are okay with glove stocks, we are not calling a sell,” he says.

In terms of foreign participation, Kaladher says foreign shareholding in the local bourse may slip further to 18% from 20.8% in August, owing to the impact of US elections.

Low foreign shareholding reduces sell-off risk

Goh does not foresee much room for foreign shareholding to decline, though. Instead, its low level will provide support to the local market.

“How much more can they sell? The low base is quite palatable for their re-entry into the market,” he explains.

Overall, Koh is “cautiously optimistic” on the stock market, supported by the “earnings recovery story”. He is hopeful that a positive outcome will emerge from vaccine development by year-end or 1Q2021.

Kanger International Bhd is the latest to jump on the vaccine bandwagon after Bintai Kinden Corp Bhd, Ho Wah Genting Bhd and Solution Group Bhd.

Koh expects the bond market will continue to garner foreign interest, which will bode well for the capital market.

He has a year-end target of 1,600 points for the FBM KLCI, implying a 6.6% upside from last Thursday’s close of 1,500.8 points.

Meanwhile, Nomura Research has introduced its end-2021 FBM KLCI target at 1,720 points.

“Overall, based on our study of the KLCI-listed universe, we expect a V-shaped earnings recovery for KLCI 30 universe aggregate profits in FY2021, specifically led by banks and healthcare (including glove makers).

“Specifically, we note that sectors such as telecommunications, energy, financials, hospitals and materials are likely to see an almost complete V-shaped recovery; however, sectors such as aviation are still seeing an L-shaped earnings curve, owing to prolonged travel bans,” it says in a Sept 17 note.

The research house adds that, as the global market is fast approaching select Phase 3 trial results for Covid-19 vaccines, it might see some rotation into value/ financials/ tourism plays in case of a favourable outcome from vaccine development.

Malaysian equities have remained more resilient than their Asean peers in 2020, with the FBM KLCI down 5.5% against a 20%-to-26% fall in the other Asean-5 markets of Indonesia, the Philippines, Singapore and Thailand.

 

 

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