This article first appeared in Capital, The Edge Malaysia Weekly on September 14, 2020 - September 20, 2020
LAST week, global markets were in a sea of red, led by the slump in US stocks.
The technology rout on the Nasdaq Composite has raised concerns that the bull has been stopped in its tracks. Analysts, however, are not too worried, viewing the setback as a healthy correction.
Locally, healthcare and technology stocks suffered the biggest losses in the past week as intense selling pressure pushed both indices down 19.9% and 9.9% respectively.
As Malaysia inches closer to the end of a six-month loan repayment moratorium period, retail participation has also reduced significantly, dragging trading volume down to below 10 billion shares a day.
Last Thursday, the benchmark FBM KLCI closed at 1,490.12 points, having declined 1.7% over the past week.
Among the indices, the ACE Index saw the biggest drop of 10.6%, followed by the FBM Mid 70 Index (-8.5%), FBM Small Cap Index (-8%), FBM Emas Index (-3.7%) and FBM Top 100 Index (-3.4%).
Over in the US, the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 fell 1.2%, 2.8% and 1.6% respectively.
TA Securities head of research Kaladher Govindan expects the local market to continue on a downward trend in the next few weeks and, probably, through October, although he is not overly worried. “When more news about vaccines comes out, we may see a further correction in the glove stocks, which will pull down the index.”
However, he reiterates that the market, having gained 22.2% since the mid-March low, is still a bull market owing to ample liquidity. “Nothing to be alarmed about at the moment,” he assures.
Areca Capital Sdn Bhd CEO Danny Wong concurs that the local stock market remains intact, and does not foresee a huge correction. “Other than the technology and glove stocks, the market has not run up a lot. Right now, investors are looking forward to 3Q corporate results and measures from the upcoming Budget 2021.”
He opines that a healthy correction is needed for the US markets, which have run ahead of fundamentals.
JF Apex Securities head of research Lee Chung Cheng believes that market consolidation will continue until firmer growth is seen in 4Q. His year-end target for FBM KLCI is 1,470 points.
“We don’t expect a big correction, unless there is a strong pullback in the US tech stocks … Beyond that, the [local] market may see a snap election in 1Q2021,” he says.
In the short term, profit-taking activity is inevitable with the ending of the grace period for loan repayments, he adds.
Lee explains that the loss of momentum in technology stocks was due to investors waiting for earnings to catch up with their price-earnings ratios. Glove stocks are expected to move sideways as their earnings have almost been factored into their share prices.
Kenanga Research head Koh Huat Soon says he is “not so downbeat” on the market, and has set a year-end target of 1,593 points for the FBM KLCI. “We think there is still liquidity that is going to drive upside in the months ahead. Investors will be positioning for growth next year.”
He stresses that liquidity must be present in order for stock prices to climb and that current market conditions are still favourable. “What gives us the confidence is that Bank Negara Malaysia and the Ministry of Finance are still in easing supportive mode, and that will have a positive impact on the rally.
“If you look back in the last economic recession, one of the bold measures taken in 2009 to address the recession was the lowering of the statutory reserve requirement (SRR) to 3%, which was much more severe than now. The central bank held the SRR ratio at low levels for two years. During the two years, the market recovered by over 70%, driven by liquidity. So, we see [something similar] happening again. Bank Negara cut the SRR six months ago [and] I don’t think they will tighten the tap so soon.”
In March, the central bank trimmed the SRR ratio to 2% from 3%. Bank Negara also allowed each principal dealer to recognise Malaysian Government Securities (MGS) and Malaysian Government Investment Issues (MGII) of up to RM1 billion as part of SRR compliance.
The combined measures were expected to release about RM30 billion worth of liquidity into the banking system.
Even so, there are some obstacles before the local bourse. Koh highlights some of the key risks, which include a decision at month-end by FTSE Russell on Malaysia’s position in the World Government Bond Index (WGBI).
“Bank Negara has done as much as it can to give the impression that we are an investable bond market. If Malaysia is excluded from the index, the knee-jerk reaction would be quite worrisome,” he cautions.
Other risks include a general election and Petroliam Nasional Bhd’s (Petronas) weak financial results, which have raised concerns over the government’s major source of income.
“All these contribute to the market anxiety. As investors are sitting on profits, so maybe this is the time to take some profits, but I don’t think it will be a major pullback,” Koh opines.
While retail participation on the local bourse has eased, it remains higher than pre-Covid-19 levels — a trend that analysts believe will persist.
“The current volume of between five billion and 10 billion shares is okay against the three billion to four billion before. Low interest rates and market liquidity have prompted conventional savers to take on a slightly higher risk-reward ratio, including in equities,” notes Wong.
However, Lee expects foreign funds to remain as net sellers until the end of the year. “Crude oil prices and political stability are the two main considerations for foreign funds. At this moment, I don’t see any big catalysts for them to come in.”
Year to date, foreign investors have offloaded RM20.94 billion worth of equities on Bursa Malaysia. In contrast, retail investors and institutions were net buyers to the tune of RM9.77 billion and RM10.21 billion respectively, MIDF Research says in a Sept 7 note.
According to UOB Global Economics & Markets Research, foreign ownership of Malaysian equities dropped to a record low of 20.8% in August against 21.1% in July.
In contrast, foreign funds favoured Malaysian bonds, which enjoyed a net inflow of RM4.3 billion for the first eight months of the year.
Is it still a good time to accumulate stocks? And if so, what should an investor buy?
Both Wong and Koh like technology stocks for their long-term growth prospects.
For those looking beyond the six-month investment horizon, Wong recommends financial stocks that have been battered by the pandemic. “In this environment, you have to play along with the recovery theme and buy undervalued stocks. Investors can look for cash-rich and high-dividend companies that are less affected by the pandemic.”
Some may be wondering if it is worth taking a bet on glove stocks, which tumbled the most over the past week. Wong is of the view that glove stocks are just a short-term play given the growing global competition to develop a Covid-19 vaccine.
Lee says fund managers would probably position themselves on value and cyclical stocks, such as plantations, banking, utilities and dividend yielding stocks.
He adds that there could be a thematic play on construction stocks ahead of Budget 2021, which will be tabled in parliament on Nov 6.
TA’s Kaladher says construction stocks may get a boost if the Kuala Lumpur-Singapore High-Speed Rail and Mass Rapid Transit 3 projects go through. However, the biggest issue revolving around the construction sector is political stability.
Kaladher opines that property stocks are worth a look in view of their cheap valuations — a price-to-book ratio of only 0.3 times versus the historical 0.8 times.
He is also positive about automotive stocks as they benefit from the low interest rate environment, plus counters Malaysia Airports Holdings Bhd and Genting Bhd.
Koh says the recovery theme will gather pace if vaccines are proved to be effective. “It might give a boost to the market, especially those that have been badly affected by the Covid-19 pandemic — hospitality and retail.”
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