This article first appeared in The Edge Malaysia Weekly, on March 14 - 18, 2016.

With the ringgit gaining strength against the US dollar, export-oriented stocks — whose prices gained on the ringgit’s weakness last year — appear to be losing favour with investors. They are choosing to take profit on tech-related counters and gloves, furniture, other contract manufacturers with export revenues.

At the same time, there are those who wonder if oil and gas (O&G) counters have been beaten down enough to become the next source of portfolio gains. After all, Brent crude oil is now back at over US$40 per barrel and the ringgit has, since the start of the year, strengthened from 4.44 to around 4.0875 last Friday.

With the share prices of glove and furniture makers down over 20% and O&G counters such as SapuraKencana Petroleum Bhd — which rose 55.15% to RM2.11 last Friday from a 52-week low of RM1.36 on August 25, 2015 — rebounding, it appears export-oriented stocks are being sold and some O&G stocks are regaining favour. But will this last?

Should investors sell exporters and put their money in O&G stocks? The short answer is no, given the limited upside for crude oil and the ringgit from current levels, according to five fund management heads polled by The Edge.

“We do not think it is time to sell the export-themed companies at the current levels. The export counters have corrected sharply and we believe the recent ringgit appreciation would have been priced in. We started accumulating some export counters as their valuations are more attractive, following the price correction,” says Chen Fan Fai, chief investment officer for retail and institutional business at Eastspring Investments Malaysia.

He opines that any positioning for O&G stocks are mainly for short-term trading as the overall outlook for the O&G sector remains poor. The latter is given that the global oil oversupply situation is unlikely to go away anytime soon. Also, expectations are for the ringgit to hover around the current levels rather than appreciate further, he adds.

“Therefore, there is no change in our investment strategy. Our investment style is bottom up and we focus on stock selections,” Chen says.

He prefers to look for opportunities in the consumer sector as there is still decent demand for certain brands or products. Naturally, his fund favours companies that can effectively capture an increasing their share of consumers’ wallets.

“Other sectors, including manufacturing (selected, but many have good business models that help them ride out downturns), and perhaps, on a relative basis, plantation companies should do better with lower supply growth as a result of El Niño,” he says.

UOB Asset Management Malaysia CEO Lim Suet Ling reckons some export-oriented counters may have corrected more than they should on the ringgit’s recent strengthening and deems it premature to bottom-fish O&G stocks.

“We are still cautious on oil and gas and will not be increasing exposure until there is further convincing information or data,” she says, adding that the position will be revisited in the second half. In the short term, she will stay defensive with high dividend-yielding stocks and consumer staples.

Sharing the same view, KAF Investment Funds Bhd chief investment officer Gan Kong Yik believes the export-oriented players will continue to show strong earnings growth year on year (y-o-y) in the next six months as the ringgit’s weakness started in July and August last year.

“For the first half of this year, if the ringgit continues to stay around the current level of above 4 against the US dollars, exporters will still show a very strong y-o-y growth for their earnings,” he says.

In terms of valuation, Gan, who remains selective on export-oriented players, agrees that foreign exchange gains may have largely been priced in or even overshot in the recent sell-off that saw some exporters’ share prices slashed by over 30%.

Exporters who continue to do well in the upcoming two earnings reporting quarters, he says, will likely win back the investors.

For now, he does not see the ringgit or oil prices strengthening significantly from the current levels and remains bearish on O&G counters, especially the upstream players.

Gan also likes construction stocks that are supported by job awards for infrastructure projects. “I think the smaller construction players will benefit more. As their bases are smaller, the contracts values will sustain their earnings longer,” he says, adding that the companies’ valuations are more attractive than their big-cap counterparts and some of them are even paying decent dividends.

Rather than making blanket statements like “sell” or “buy” export-theme counters, RHB Asset Management Sdn Bhd chief investment officer Hoe Cheah How prefers to focus on the fundamentals, specifically earnings growth and successful capacity expansion rather than a currency-driven opportunity that can be fleeting.

“For the export theme, again, we have to look at the source of earnings growth. Is the growth driven solely by currency impact or is it driven by new capacity and product? If it’s the former, we would agree to sell,” he says.

As for beaten down O&G counters, he reckons that growth prospects for the sector are still far from their heyday. He does not expect the counters to reach their previous highs in the near term, given that contract margins are no longer lucrative.

“In hindsight, we were lucky to foresee that oil and the ringgit were overly [sold down] about two months ago. We called for tactical buying on a rebound of oil-related sectors and took profit on [counters] that purely benefited from the ringgit’s weakening. With Brent crude oil rebounding 30% from a low of US$30 per barrel and the ringgit from 4.40 to below 4.10, I think the oversold position was somewhat recovered. So, the tactical strategy was best done in January. It is back to the normal strategy now — fundamentals,” says Areca Capital Sdn Bhd CEO Danny Wong.

Wong sees a better 2016 vis-à-vis 2015 as the massive selldown and outflow in 2015 are unlikely to be repeated this year. He also expects a better 2H2016 on better commodity prices and consumer sentiment. “Thus, it’s an opportunity to accumulate good fundamental stocks if the market retracts in the short term for a second-half recovery. I like construction, O&G, plantation, banking and technology-related sectors,” he concludes.

In fact, in a March 10 note headlined “Window of opportunity for exporters”, UOB Kay Hian Research pointed out that exporters have significantly underperformed the market year to date.

“The fall in stock prices is driven by the ringgit’s strength (with lower ringgit-based revenue and margins), and for the glovemaking sector, reversal of an overly aggressive price earnings multiple expansion in 2015. Nevertheless, UOB Global Economics & Markets Research foresees the ringgit trading at a softer RM4.10-RM4.20/US$ through 2Q2016, reflecting events that support the greenback (for example, a possible interest rate hike by the US Federal Reserve in 2Q2015, Britain departing from the European Union and the renminbi easing again as China signals monetary easing bias), while foreign investors of the ringgit could be sidelined ahead of the announcement of a new Bank Negara Malaysia governor.

“Selected exporters could offer prospective near-term gains of 5% to 10% versus a marginal prospective gain for the FBM KLCI. We maintain our end-2016 FBM KLCI target at 1,750, which implies 15.4 times 2016F price-earnings ratio,” UOB Kay Hian Malaysia head of research Vincent Khoo and three others wrote in the note.

They upgraded the manufacturing sector to “overweight” after upgrading their recommendation on export-oriented counters like JCY International Bhd (78 sen target price), Kossan Rubber Industries Bhd (RM7.75 target price) and VS Industry Bhd (RM1.60 target price) to a “buy”.

According to them, these stocks now trade at compelling price-earnings valuations. Kossan, for instance, has the lowest price-earnings multiple within its glovemaking sector coverage while “cash-rich and high-yielding JCY should benefit from a modest turnaround in global hard disk drive demand as well as market share gains”. UOB Kay Hian also has a “buy” on Scientex Bhd (RM12.50 target price). “Overall, our 2016 earnings forecasts for the stocks we cover conservatively incorporate the ringgit at around RM4 to the US$,” they added.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.