Friday 29 Mar 2024
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This article first appeared in Capital, The Edge Malaysia Weekly on January 11, 2021 - January 17, 2021

ALTHOUGH the recovery theme has been the focus of investors in the weeks closing out 2020 and entering 2021, analysts caution that it is not a broad-based nor clear-cut theme because there are still many uncertainties ahead, even though vaccines for Covid-19 are now available.

Be selective and study the stocks, as not all in the recommended sectors will deliver, cautions Areca Capital CEO Danny Wong, following a 34-point slump in the KLCI in the new year on the back of profit-taking focused on glove makers and banking counters before losses were slightly pared and the benchmark closed at the 1,602 level.

“This first week of the year has been a guide for us. Those who want to participate in the market can tell that 1H2021 should be better than last year on account of positive vaccine news, better business sentiment and the notion that most businesses will see recovery in earnings over the next two quarters,” Wong tells The Edge, noting that longer-term investments with a two- to three-year timeframe make better sense than short-term ones.

Investment picks

“I am very positive on the technology sector, which will be a continuing theme with the advent of 5G in Malaysia and globally. Banking stocks have [continuity] too, but be careful to select stocks with good returns. If the economy does recover, factories will go full swing, therefore, utility monopolies will do well,” Wong says.

(Photo by Areca capital)

“Malaysia will bank on infrastructure projects to recover. Therefore, watch out for mega projects in the construction sector.”

Rakuten Trade Sdn Bhd head of research Kenny Yee concurs: “The recovery play is on. I am not expecting a sharp recovery play but a gradual one. The truth is that the pandemic isn’t actually over; therefore, recovery may take longer than expected.”

That said, research houses have been cautiously optimistic about the economic recovery, given the multiple Covid-19 vaccine breakthroughs, continuing fiscal and monetary stimulus, low interest rate environment and China’s firmer economic recovery.

Maybank Kim Eng has one of the most bullish year-end projections for the FBM KLCI at 1,830 points. The research house says the corporate earnings outlook and liquidity appear good, and that the economy is expected to grow 4.5% year-on-year (y-o-y) in 2021, compared with 2020’s steep 11% contraction.

It expects earnings growth to be backed by the glove sector and recovery play sectors to include gaming and finance.

These positive factors are expected to underpin interest in the equity market, although the Restricted Short Selling (RSS)-led selling spree after a long ban since March 20 may dampen sentiment momentarily.

(Photo by Rakuten Trade)

HLIB Research cautions that the absence of immediate-term drivers may extend the consolidation of the KLCI, particularly in view of less positive news reports of a resurgence in the pandemic, challenges faced by nations in vaccinating their citizens, the resumption of RSS, and the cancellation of the KL-Singapore High Speed Rail.

“Given that the last two months of 2020 were so strong, a market correction is natural. We expect smaller-cap stocks to play catch-up with the strong buying support for blue-chip counters,” Yee says.

On the other hand, Nomura expects the economy and corporate earnings to stage a V-shaped recovery this year, with gross domestic product (GDP) growth of 6.6%.

According to Nomura, corporate earnings are likely to rebound in FY2021, owing partly to the fact that harsh lockdown disruptions in 2020 are less likely to come into effect again this year. The research house also expects both monetary and fiscal policies to remain supportive, with the low overnight policy rate (OPR) of 1.75% to be maintained throughout the year.

“We expect one more 25-basis-point OPR cut in 2021, and the fiscal deficit to remain elevated at 5.4% of GDP compared with 6% last year,” it said.

Similarly, Credit Suisse expects Malaysia to chart a V-shaped earnings recovery of 58.8%, and GDP growth of 6.7% in 2021, behind the projected 7.4% and 7.1% expansion for the Philippines and China respectively.

MIDF Research says Malaysia’s economy will be able to grow 7% in 2021, a forecast that falls between Bank Negara Malaysia’s and the Ministry of Finance’s growth targets of 6.5% and 7.5% respectively.

“The expectation was constructed based on the recovery we have seen so far and the prospect of a successful containment of Covid-19 in the country and also key trading partners. We have witnessed a significant improvement in Malaysia’s 3Q2020 economic performance, where GDP shrank at a much lower pace of 2.7% y-o-y compared with the record fall of 17.1% y-o-y in 2Q2020,” it said.

As an investment strategy, Credit Suisse recommends striking a balance between recovery and defensive qualities. “The recovery play will be on banks, gaming and tourism, construction, property and conglomerates, while there will be less dependence on economic recovery, which are gloves, healthcare and technology.”

RHB Research says investors should look for opportunities to raise the weightage of cyclical and value stocks but still remain within a balanced portfolio of trading and defensive components.

“Given the potential for volatility as the markets adjust to shifting expectations, a balanced portfolio remains appropriate, comprising a trading bucket, coupled with an increasing focus on cyclical sectors to be adequately positioned for a gradual structural recovery, back-stopped by core holdings in defensive and resilient yield stocks,” the bank-backed research house says.

Nomura notes a “healthy 14% to 15% profit growth is expected for the rest of the KLCI constituents in FY2022” even after the recent index reconstitution, which narrowed glove stocks in the index to three.

“As glove makers’ supernormal FY2021 profits are expected to start normalising in FY2022, KLCI-member earnings will appear to rise sharply in FY2021 and then decline in FY2022,” Nomura says.

CGS-CIMB analyst Ivy Ng adds, “Analysing the KLCI’s historical data, we note that the KLCI’s performance tends to be mixed in January, with an average m-o-m negative return of 0.6% over the past 10 years and positive 1.6% return over the past 42 years.”

She expects investors to be monitoring the Monetary Policy Committee meeting on Jan 20 and the US Federal Open Market Committee meeting on Jan 27, and corporates to have their eyes on the market impact, following the resumption of RSS on new year’s day.

Malaysia last in line for foreign funds

In 2020, outgoing foreign funds hit a record high of RM25 billion.

Rakuten’s Yee points out that, while the weak US dollar has reportedly triggered a return of foreign investor interest to emerging markets, unfortunately, Malaysia lies on the “bottom rung”, owing mainly to its low market liquidity compared with other countries in the region.

China and Hong Kong top the list, followed by Southeast Asian countries, to benefit from the spillover, he notes.

Areca’s Wong says the weak ringgit may, however, be a draw for foreign funds to make their way back to Malaysia.

“Foreign investors will look at big-cap stocks and, in doing so, utility stocks will be of interest. Malaysia [compared with the rest of the region] may not be a prime destination for investments, and the ringgit is deemed to be undervalued and [already] down for a number of years. Yet, the ringgit play has drawn foreign interest all the same. This is evidenced by net inflow in the bond market as well as equities,” he observes.

Meanwhile, Rakuten’s Yee says laggards such as telcos and the gaming sector are expected to recover this year, in addition to a potential flow of funds into plantation counters, which have not moved in tandem with crude palm oil prices.

Glove stocks will remain volatile, he notes. “After the supernormal profits in these two years, 2022 will see the beginning of the downtrend in earnings as normalisation kicks in. Glove stocks, despite the downtrend, will still do better than pre-Covid-19 prices, owing to maintained utilisation of the commodity despite a decline in average selling prices.”

 

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