This article first appeared in Capital, The Edge Malaysia Weekly on May 24, 2021 - May 30, 2021

AMID record high Covid-19 cases and uncertainties over further lockdown measures, the ongoing selldown in the Malaysian stock market has given rise to the question of whether investors should adopt the defensive approach by holding back from short-term play and investing more heavily on value stocks for better dividend yields instead.

The nation’s recovery has been patchy with near-term encumbrances to economic activity such as the implementation of the Movement Control Order (MCO) 2.0 in January, and now MCO 3.0. It is a contrasting reality compared with advanced economies such as the US, the UK and China, where the curve of infections and deaths is flattening out.

A recent CGS-CIMB report points out that consumer staples could be facing cost escalation from higher commodity prices, possibly resulting in a squeeze on margins.

“The US is doing so well that they even expect 6.5% [of GDP] growth this year, while China anticipates 18%,” Kenanga Research head Koh Huat Soon tells The Edge.

“For the near term, we need to start seeing Covid-19 numbers fall before the market can recover. That said, we are hopeful for improvement in the third quarter of the year (3Q) as the vaccination rollout picks up,” he says, adding that inflation risk in the near term is worrisome.

He expects the inflation rate to reach 6% to 7% in 2Q this year, against 5% deflation in the same quarter a year ago.

Short-term volatility, as seen amid the present weak sentiment, has proven to easily dampen the market. News of daily cases hitting 6,000 in the last few days pushed the market down immediately.

“Therefore, look six months to a year from now. Look for stocks that have a chance to recover, those that will dip below their intrinsic value or will have a higher value in the future,” Areca Capital Sdn Bhd CEO Danny Wong stresses, encouraging investors to maintain a balanced portfolio of risks and objectives as well as to focus on stocks that will bear fruit in 10 to 20 years’ time.

“If you foresee [positive] developments in the technology sector such as the 5G rollout, Internet of Things and related movements, then those counters are worth your investment today despite the fact that the sector is highly valued now. Such companies will be profitable in the future,” he explains.

Potential setbacks to the ongoing recovery theme have Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng concurring that it is timely to invest in high dividend yield stocks since interest rates remain low.

“In spite of that, high dividend stocks have not performed. Bear in mind that the stocks you are investing in [need to] show sustainable profits,” says Ang, citing banking and toll concession company stocks as examples.

Meanwhile, Principal Asset Management chief investment officer Patrick Chang is positive on the current market scenario, seeing hopes of recovery in the second half of the year.

“Over the short term, we are positive on developed markets, namely US equities, on account of many developed nations’ ability to contain the coronavirus,” he says.

Chang’s optimism also reflects the strong US growth underpinned by the US$1.9 trillion (RM7.9 trillion) relief bill signed by President Joe Biden on May 11 and his proposed US$2 trillion infrastructure plan.

“We continue to be bullish on Asia-Pacific over the next 12 months, riding on the broadening out of economic recovery and reopening exposure outside of China, as well as strong earnings growth and ability to pay higher dividends,” he says.

Kenanga’s Koh maintains that it is good for conservative investors to be on the defensive during uncertain times. But those with a longer-term horizon can be more aggressive to remain invested. That said, investors can be more confident going into the second half as the market will likely bounce back, he adds.

The research house’s calls have been positive on technology, banking counters and plastic manufacturing, which has been a pandemic beneficiary as a result of the increased usage of food packaging. Koh explicates that technology stocks are not a part of the recovery play but, rather, one of circular growth.

In any case, the improvement in global markets is a boon for Malaysia’s export sector. While the overall bullishness of advanced equity markets may not impact Bursa Malaysia directly for now, the pickup in those economies has meant increased demand for Malaysian exports namely in the technology, plantation and manufacturing sectors where building materials are concerned, says Koh.

“We like REITs as they will be a prominent fixture in the economic reopening play. However, [they are] still a laggard with [their] main catalyst being the return of footfall, which will not reach pre-pandemic levels anytime soon,” Kenanga’s Koh says, stressing that REITs’ current lower yields of 3% to 4% are still better than current interest rates of below 2%.

For the record, investors have been concerned that poor footfall and tenants struggling to renew rental contracts during the pandemic will result in REITs’ inability to deliver healthy returns.

“While yields may not rise much this year, investors can look forward to capital gains once economic activity resumes,” Koh says.

Like Areca Capital’s Wong, Koh foresees the KLCC Stapled Group benefiting from the resumption of footfall from retail as well as significant office rental collection from its main tenant Petroliam Nasional Bhd, which occupies the iconic Petronas Twin Towers.

“Similarly, Axis Real Estate Investment Trust (Axis REIT) has demonstrated resilience with [an implied] decent yield of 5.3%. As for IGB REIT, however, be prepared for a higher risk, as it is a purely retail play. Generally, we like suburban malls as these are not dependent on tourist footfall and international travel,” Koh explains.

While acknowledging the pressures of rental tenancy, Wong points out that not all REITs will be brought to their knees as some are still “flush with liquidity”.

For some suburban malls, he explains, tenants are not dependent on walk-in sales. Luxury brand Salvatore Ferragamo’s outlet in Pavilion, for instance, exists for branding purposes.

“This is why there has not been a massive shuttering of shoplots in designated town malls such as Mid Valley Megamall, Pavilion Kuala Lumpur and Sunway Pyramid in the Klang Valley,” Wong says.

Areca Capital likes REIT players such as KLCC Stapled Group, Sunway REIT and IGB REIT for their steady performance amid the challenges posed by the pandemic. KLCC Stapled Group’s rolling 12-month dividend of 30 sen per share (DPS) implies a 4.4% dividend yield, while Sunway REIT’s and IGB REIT’s DPS of 4 sen and 6 sen translate into dividend yields of 2.86% and 3.66% respectively.

“Office REITS, however, may be facing pressure arising from the office glut. This is a pre-Covid-19 issue that’s now exacerbated by entire workforces working remotely,” Wong notes.

Meanwhile, Principal Asset Management is generally “neutral” on REITs. Any exposure would likely be on industrial names rather retail plays, Chang says.

Other dividend stocks such as breweries Carlsberg Brewery Malaysia Bhd (3.2%) and Heineken Malaysia Bhd (2.74%) or tobacco maker British American Tobacco (Malaysia) Bhd (5.37%) will have to balance between dividend payouts and conserving cash, Kenanga’s Koh says.

Note that analysts have trimmed their target prices (TPs) for Carlsberg Brewery Malaysia on expectations that near-term demand for beer could be choked by lockdowns.

Hong Leong Investment Bank (HLIB) Research analyst Gan Huan Wen cut the counter’s TP to RM22 from RM22.50 earlier, while Kenanga Research’s Ahmad Ramzani Ramli lowered his TP for Carlsberg to RM24.10 from RM25.65 based on a lower price-earnings ratio (PER) of 25 times for FY2021, compared with 29 times previously.

That said, Kenanga’s Koh believes the breweries’ dividends will be restored by year-end.

The current market environment would suggest a barbell strategy of exposure to “reflation” sectors like energy, consumer, industrials and financials, alongside structural growth plays, says Principal Asset Management’s Chang, as he believes this could enable investors to navigate near-term volatility and position for long-term growth.

“People call this the reopening play. Developed markets are recovering; therefore, whether the demand is for commodities [or] industrial equipment, these are things that are perceived to be of value at the moment,” he says.

Chang explains that there is always upside in markets as long as investors focus on the long term, given that the recent correction provides investors the opportunity to buy Asian and Malaysian equities cheaper.

Furthermore, with the US economy reopening and vaccine rollouts accelerating across key regions, the fund management house is still expecting a resilient global growth.

“In the near term, the market may continue to focus on the inflation story but we believe major central banks are likely to stay put and keep policy accommodative for the foreseeable future. This could essentially weather the short-term inflation storm,” Chang adds.     

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