This article first appeared in Capital, The Edge Malaysia Weekly on January 18, 2021 - January 24, 2021

THE Movement Control Order (MCO), which has been reinstated in five states and three federal territories for two weeks, and the declaration of a state of emergency until August appear to have had just a minor effect on the local bourse. The FBM KLCI fell sharply on Tuesday when the emergency was announced but rebounded strongly on Wednesday for an overall positive week. Looking at the share prices across the board, for many, there is a feeling of déjà vu.

When the MCO was first enforced on March 18 last year, not many would have thought that stocks would rebound quickly, aided by market liquidity and a loan moratorium.

This time around, analysts believe that while retail participation will remain elevated, the euphoria of last year is unlikely to be repeated.

HLIB Research head Jeremy Goh says last year’s numbers suggest that the local market will see active trading during the current lockdown.

“Retail participation averaged 27.1% from January to mid-March 2020. Then it went up to average 31.5% during MCO 1.0,” he adds.  

In the middle of last year, retail participation surged to above 40%, before averaging 39.8% in the last quarter. On Aug 11, 2020, trading volume on Bursa Malaysia hit a record high of 27.8 billion shares, driven mainly by penny stock transactions.

MIDF Amanah Investment Bank Bhd research head Imran Yassin Yusof says in the absence of the blanket loan moratorium introduced last year to combat the impact of the pandemic, the daily trading volume this time is unlikely to rise to an extremely high level.

“We could potentially see active trading on the local bourse in the next few months, but not the same level we saw last year,” he tells The Edge.

Goh cautions that the equity market will remain volatile in the first half of the year. “We will see opposing news flow during this period between positive vaccine developments and rising Covid cases, bringing much volatility along the recovery path. In tandem with this opposing news flow, retailers are likely to be actively switching between recovery plays and glove stocks.”

Meanwhile, an analyst who declined to be named says the valuations of stocks across the board are already at high levels, in stark contrast to the situation during the sell-off last March.

“At that time, stocks were very cheap. But today, it is very expensive relative to the recovery story. Nevertheless, retail investors will still be in the market as they do not have better investment options in this low interest rate environment,” he explains.

CGS-CIMB Research in a Jan 12 note says it expects Bank Negara Malaysia to debate further monetary policy easing at its next Monetary Policy Committee meeting on Jan 20. It does not discount further cuts to the overnight policy rate (OPR), currently at 1.75%.

Despite a rebound in glove stocks, the analyst foresees volatility in the next few months due to development on the vaccine front.

“Recently, Pharmaniaga Bhd announced a deal with Sinovac and the vaccine will be ready by end-March, so it is just a two-month window before the vaccine is available. Once 50% of the population is vaccinated, the pandemic will be close to over; that means less demand for rubber gloves.”

As the government has made deals with several vaccine developers, he says the vaccine development catalyst has mostly been priced into vaccine-related stocks already, including the many companies that are diversifying into vaccine distribution.

“During this period, there could be some more upside but it will be a situation play, if any,” he adds.

MIDF’s Imran is of the view that interest in vaccine-related stocks is overplayed pending further information, including profit contribution.

Technology stocks, which were among the star performers on Bursa Malaysia last year, are expected to do well this year.

“We will continue to see a rally in technology stocks on the back of a better outlook for the semiconductor sector,” the analyst opines.

Last week, technology stocks were among the top gainers on the local bourse after investors appeared to be relieved by Prime Minister Tan Sri Muhyiddin Yassin’s rationale for the state of emergency.

The FBM Technology Index has risen 7.3% year to date after an 83.9% gain last year.

Both global semiconductor sales and spending forecasts are pointing north for 2021, according to HLIB Research’s Jan 13 note (see chart). “Growth is expected to be driven by smartphone, communication, HPC [high performance computing], IoT [Internet of Things] and auto. We maintain [an] ‘overweight’ stance and [are] tactically in favour of front-end players.”

Besides their robust earnings outlook, MIDF’s Imran says technology stocks are underpinning work-from-home arrangements.

“Some investors might have a simplistic view or analysis of the market. Sentiment thinking is that technology companies should benefit from the work-from-home model.

“Similarly, for glove stocks, when new Covid-19 cases surged, people would go for glove stocks, but the catalyst has been priced in already. Nonetheless, interest in glove stocks will not wane in the next few months.”

While the MCO is a dampener for recovery stocks, Imran maintains the view that it is a recovery play for 2021.

“For us, recovery is still intact, albeit with some marginal compression because of the MCO. The focus will shift away from cyclical stocks to recovery stocks when the MCO is lifted.”

Oil and gas stocks are also seen to remain resilient owing to Brent crude staying above US$55 a barrel.

“We don’t expect demand for oil to go up to the pre-pandemic level this year. [But] definitely, we will see demand recovery, especially with a successful vaccine rollout. If oil price falls below US$50, then we might see selling pressure,” he says.

Another analyst, however, is worried about the impact on the retail, gaming and brewery sectors if the MCO is prolonged.

“The brewery industry depends a lot on this time of the year for their business. If the MCO were to be extended, with fewer [people] travelling and visiting, then demand for alcoholic drinks will be much less.”

He believes the impact on the banking sector will be limited if there is no mandate for a loan moratorium. “Having said that, there will be fears that non-performing loans will rise.”

RHB Research says in the Jan 13 note that although an extended MCO will pose downside risks to economic and corporate earnings growth, investors should not lose sight of the light at the end of the tunnel.

“With the availability of the vaccine being a matter of time, we believe that positioning for a post-pandemic scenario should remain the key focus. Accordingly, market volatility will present opportunities to reposition into cyclical and value stocks, with risk assets back-stopped by supportive monetary conditions and fiscal initiatives.”

“Ample liquidity implies shallow market corrections while, conversely, investors’ propensity to take profit on sharp rallies should remain elevated.

“Given the potential for volatility, a balanced portfolio remains appropriate. This comprises a trading bucket, coupled with an increasing focus on cyclical sectors and tactical holdings in defensive and resilient yield stocks.”

The research house has “overweight” ratings on banks, non-bank financial institutions, automotive, construction, rubber products, basic materials and gaming stocks.

Last year, the value of ACE Market stocks more than doubled compared with the benchmark FBM KLCI’s 2.42% rise.

Analysts say higher retail participation will continue to support the interest in small-cap stocks.

“Retail investors don’t really look into index-linked stocks; they are more into small-cap stocks. But bear in mind that it will be more speculative,” an analyst notes.

MIDF’s Imran concurs, saying that the “stay at home” order will sustain retail investors’ interest in the stock market.

“Not all investors have the capability to invest in the Main Market due to the relatively higher prices. It is easier for them to buy ACE Market stocks. Again, we will see less liquidity this time around,” he adds.

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