This article first appeared in Capital, The Edge Malaysia Weekly on May 17, 2021 - May 23, 2021

WILL the “sell in May and go away” adage still apply this year with the Covid-19 pandemic still raging?

The popular refrain refers to fund managers in the West trimming their positions and taking profit before going on their summer vacation. But with work-from-home restrictions and cross-border bans enforced for the second year running, effectively ruining vacation plans, how will fund managers react?

In any case, the adage does not always apply — and arguably more so in times of uncertainty and upheaval.

In the first week of May, local equities slipped to 1,575.67 points, which was 2.9% or 47.8 points lower than the April 26 close of 1,623.47 points.

But things were very different last year. May 2020, being an unprecedented year because of the Covid-19 pandemic, proved an exception to the general mid-year trend.

Having slipped 2.2% or 31.19 points to 1,376.59 points at the start of the month from 1,407.78 points on April 30, the market continued on an upward trajectory to close at 1,473.25 points on May 29.

Then, amid frenzied interest in glove stocks, and a number of listed companies announcing their foray into glove, mask and personal protection equipment manufacturing and other healthcare-related sectors, the market continued its rally to 1,681.41 points on Dec 16.

“Looking at Bursa’s performance for May over the past 10 years, I do not foresee any significant upward or downward movement in the bourse this month. The month of May is likely to remain at the 1,600-point level,” says Areca Capital CEO Danny Wong.

Selling in May was a more feasible notion during pre-pandemic times when the bourse performed better throughout the year.

Looking at the last decade, Bursa Malaysia’s performance in May was mixed as it was up from 2011 to 2014, and down for the next four consecutive years until 2018 before recording gains in 2019 and 2020.

“Trading volume on Bursa tends to be higher in the first half [of May] and lower in the second half — quite the opposite of bourses in the northern hemisphere, where people sell a portion of their portfolio and go for their summer holiday,” Wong explains.

MIDF Research head Imran Yusof says for the past five years — 2020 being an exception because of the pandemic — May had not been a good month for Bursa as the FBM KLCI saw year-to-date (YTD) declines in the month.

Imran believes it is possible for the “sell in May” adage to hold true for Bursa this year on account of external factors instead of the domestic market. He anticipates a pullback in cyclical stocks in external markets, especially in the US and Europe, given their strong performance in the fourth quarter of 2020 and first three months of 2021, leading to lofty valuation levels.

“This may cause investors to lock in gains and this correction will likely have an influence on the regional market performance in May. That said, we expect that the market correction in regional peers and Malaysia will not be as much as what it may be in the US and Europe, given that we have observed this pullback earlier as the Malaysian market had been trading within a tight range for some time.”

In addition, the Hari Raya festivities may affect trading for at least the next couple of weeks even though celebrations will be subdued because of localised Movement Control Orders (MCOs).

“Therefore, we do not expect a breakout upward trend for Bursa, at least for the month of May. The best scenario that we expect is that our domestic market will be trading range-bound,” projects Imran.

Investment managers have been apprehensive about the market outlook owing to current realities such as the unexpected surge in coronavirus cases and hiccups in Malaysia’s vaccination rollout, which have dampened economic activity. As corporates release their quarterly financial results in May, investors will be monitoring the impact of MCO 2.0 on earnings.

CGS-CIMB Research head Ivy Ng says investors will also have observed that the rollout of the coronavirus vaccination programme may not be progressing as well as expected. In addition, the reopening of borders and return of tourism and related activities have not even come close to anticipated timelines, which pose further earnings risks.

“Consider how the ban on inter-district and interstate movements is affecting businesses. The sentiment at the start of the year was one of hope and optimism for recovery, with FBM KLCI earnings expected to grow 30%. Nobody expected the surge in Covid-19 cases in India as seen today. That will be in focus. People are on edge if it should worsen and they are watching the government’s next steps closely,” says Ng.

Rakuten Trade research head Kenny Yee attributes Bursa’s underperformance this year to the exit of foreign funds.

“It’s not a matter of low valuations. Foreign funds are just not coming in. Investors seem apprehensive about the political scene. In light of the poor sentiment, trading trends appear to be brief, which poses another problem. At the current PER (price-earnings ratio) level of 12 to 13 times, plantation stocks are doing well, as is the rest of corporate Malaysia. We are seeing solid earnings growth this year, yet it has not been enough to pull in any foreign money or any sustained interest in Malaysia. Current foreign investments are at a record low,” Yee adds.

Rakuten Trade’s year-end forecast for the FBM KLCI is 1,840 points, a figure that Yee is rather apprehensive about at this juncture, given market conditions.

Investors are not putting their money into the rest of Southeast Asia, either, he observes, adding that East Asian countries, namely Hong Kong, Taiwan and China, have been the more popular destinations for foreign investment in Asia.

“Institutional investors are just not convinced. Retail players in Malaysia are the saving grace as they are still actively investing in the equities market,” Yee says. “The rotational play among small-cap companies is ongoing, with no particular theme in focus. For now, I don’t see a strong interest in any particular sector.”

CGS-CIMB’s Ng points out that the nation’s state of Emergency is a deterrent for foreign investment in Malaysia, and that “the ‘sell in May’ adage was applicable to Malaysia previously when foreign investors were keener on our market”.

While Bursa data shows YTD foreign fund outflow as at May 6 stood at around RM2.9 billion, it is significantly lower than the RM10 billion in the same period last year. In fact, it is about the same level as the YTD outflow of RM2.8 billion in 2019.

“First, it isn’t that foreign investors are only exiting Malaysia, as this outflow is observed in other markets as well. Second, while foreign fund inflow will boost our market, we do not believe it to be the only factor to do so. We believe that the year-end FBM KLCI will more or less reach our 2021 target [of 1,700 points], albeit with some slight difficulty without the participation of foreign funds,” MIDF’s Imran says.

Imran says his research house will maintain its expectation of trends for 2021. It anticipates the automotive, banking and construction sectors to benefit from economic recovery, and that a rise in commodity prices will benefit commodity sectors such as oil and gas (O&G) and plantations.

“A possible ‘taper tantrum’ may cause a correction in the market, presenting buying opportunities for investors, given that we expect the underlying trajectory of the economy and market to continue on an upward bias,” he adds.

Similarly, Wong is positive on the market’s performance for the next 24 to 36 months. “I am certain that the economy will rebound, business activities will resume and corporate earnings will pick up, especially coming from the low base of 2020. If the majority of the population gets inoculated (against the coronavirus), business will rebound to full swing. Value stocks such as banking counters, despite the lack of development in digital banking, will make a comeback.”

He reiterates that businesses that ride the themes of e-commerce, software, hardware and automation in the coming years will thrive as the Covid-19 pandemic has accelerated technological adoption.

“Malaysia, being a last-in-line producer in the electrical and electronics export value chain, benefits as new innovations come onstream. We can see how the global shortage of chips will continue to drive Malaysia’s economy and gross domestic product.”

He also believes the growing global play on environment, social and corporate governance (ESG) is gaining traction and is certain to affect certain counters.

“While institutional investors will not avoid stocks [with lower ESG scores] completely, they will reduce exposure to them,” Wong says.

In the middle to long term, the ripple effect will be evident in the counters of conventional utilities players as well as O&G, and they may be left behind as more ESG-focused companies come into favour.

“This is an idea of the progression of stock movement over the years, which retail players are particularly sensitive to,” Wong explains, adding that businesses have to be quick to respond to the changes that will come as recovery will not be straightforward.

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