This article first appeared in Capital, The Edge Malaysia Weekly on December 28, 2020 - January 3, 2021

Vincent Khoo

Head of research

UOB Kay Hian Research

This year began with an unprecedented triple-whammy infliction — the creation of a backdoor government, fallout in the Opec-Russia production quota agreement and, most ominous, the Covid-19 pandemic, which induced globally concerted lockdowns. The lockdowns crashed global economies and induced extremely dysfunctional capital markets — wild credit spreads and extreme movement in the Volatility Index for US equities, many spectacular limit downs and limit ups, and a historic plunge of WTI crude oil (May) futures contract prices to -US$37 a barrel.

Malaysia had more than its fair share of domestic woes — debt downgrade by Fitch, constant political rife, and three water supply disruptions in the Klang Valley — and the country had to endure a third and more powerful wave of Covid-19 infections in October after a state snap election was held in Sabah. Nevertheless, the government lockdown also induced the swiftest policy responses at both the fiscal and monetary fronts, including unprecedented fiscal stimulus, a bank loan moratorium and a ban on short-selling of equities. Such prompt policy responses have been instrumental in swiftly bringing the global equity markets out of the bear markets, induced record retail investor participation and Fear of Missing Out (FOMO) trades and charged the index into bull market territory after glove producers revealed unimaginable hikes in product prices (more than five times higher at year-end) as global demand surged.

Finally, optimism of an effective vaccine find in November, following the encouraging final-stage trial results of prominent biotech companies such as Pfizer-BioNTech and Moderna, further reinforced the full recovery in the FBM KLCI. Economic-reopening plays dominated market momentum, most prominently banks, aviation and gaming stocks.

Flattish returns in 2021

For 2021, we expect the FBM KLCI to generate flattish returns but produce a wide breadth of winners as the global dissemination of World Health Organization-endorsed Covid-19 vaccines gradually ushers back consumerism and enables the gradual reopening of borders. Market valuations will price in economic and business recoveries through 2022, backed by globally dovish policies (with no overtures of policy rate hikes throughout the year). Characteristically, there will be lower market volatility, but the market’s recovery will be uneven, mainly mirroring the spotty K-shaped economic recovery, as the current wave of Covid-19 nationwide infections continues to ravage the economy and, particularly, small and medium enterprises.

Economic recovery will be slow, in tandem with the slow mass dispensation of Covid-19 vaccines. Consequently, we brace for more business closures or consolidations in 1H2021, as well as rising bank non-performing loans after the expiries (in mid-2021) of the government-mandated loan repayment moratorium for B40 income earners, alongside the bulk of banks’ rescheduling and restructuring programmes. Our view for a potentially moderate market consolidation towards mid-2021 also factors in challenges to the federal government’s revenue and fiscal deficit, which dampen the deployment pace of mega projects. Market sentiment may also turn slightly cautious again in 2H2021, in pricing in a potential snap general election.

We peg our end-2021 FBM KLCI target at 1,640, valuing the market at 14.9 times 2021F price-earnings ratio, or -1 SD to the historical mean PE of 16.2 times. The top down year-end target is prudent and is well below our bottom-up FBM KLCI target surpassing 1,700. This would be the first time the FBM KLCI is expected trade below mean valuation in many years as the glove sector, which accounts for a sizeable chunk of index weightage of 14%, would be trading significantly well below the FBM KLCI’s mean PE to factor in the sector’s super-cycle earnings in 2021.

To optimise returns, we prescribe a dynamic strategy involving cyclical, yield and value, and growth investment themes in calibrating to the uneven economic recovery. We recommend taking on a more risk-on approach at the start of the year, then turn defensive by 2Q2021, before turning risk-on again, particularly for late-cycle stocks in 2H2021. Even after the impressive gains since November, most reopening plays are expected to outperform in 1Q2021, although many of these stocks are expected to give up some gains in 2Q2021 to reflect the ongoing sombre economic conditions.

Thematically, we embrace the economic reopening, trade diversion, global 5G roll-out and high dividend yielder investment themes.

For 1Q2021, we recommend to “overweight” the retail and F&B segments, gaming and, tactically, banks (although expect an uneven outperformance), as well as selected exporters (electrical and electronics and manufacturers). Real estate investment trusts would also outperform. However, personal protective equipment-related stocks may underperform, particularly after 1Q2021, and we would still avoid companies that feature Z-scores in the financial distress zone (for example, AirAsia Group and some property companies). There are high risks that companies with exceptionally low Z-scores may need to recapitalise, which could be significantly dilutive to shareholders.

Meanwhile, we advocate to only “market weight” cyclical sectors, which are highly dependent on government-related expenditures (construction and selected oil and gas stocks) and sales of high-ticket items (automobile and property sectors).

Ami Moris

CEO

Maybank Kim Eng Group

They say hindsight is 20/20 and as we close out a year that has been the most tumultuous in generations, there isn’t much left to say that hasn’t already been said many, many times over. So, let’s talk about moving forward.

A new halo of responsibility

If the last four years were overshadowed by Brexit and Trumpism, 2021 should be a watershed.

With a Joe Biden administration taking the reins in the US, and Europe and the UK looking like they will reach a Brexit agreement, all the signs are there that 2021 will usher in not only a post-Covid-19 emerging market surge, but also a new era of responsibility and integrity towards the causes that matter beyond the financials.

2021 may likely be defined by preparations for COP26 (UN Climate Change Conference of the Parties), to be held in November in Glasgow, Scotland.

Generally aligned and principled global leaders, a goldilocks scenario of continuing fiscal stimulus and accommodative monetary policy, combined with global citizens and corporates that are looking to take action with their wallets, creates the right climate for emerging markets to make a substantive and transformative impact for sustainable growth.

The ‘S’ needs to drive the ‘E’ and ‘G’

While we have previously given heavier consideration to the “G” of ESG (Environmental, Social and Governance), 2020 has convinced me that in order for us, as capital market leaders, to get sustainability in our marketplace right, we need to first build the “S” in order to make an impact on the “E” and the “G”.

This was never as clear as when I was having to work through deeply human conversations of mortality within the corporate environment.

In that moment, it became very clear that, in our corporate life, our language may indeed be human, but we are not often called upon to articulate the humane.

In a situation where I was profoundly overtaken by grief at the passing of a colleague while conducting a Zoom call, I gained a greater appreciation of how important the social component is in our corporate culture.

The switch from corporate speak to raw emotion did not come easily. The disconnect was an obstacle between needing to “be humane” in the situation, but not having the language immediately at hand to do so.

Learning how to accept and frame emotion within our corporate speak will help to build more of the “S” into our conversations and actions within our organisations and the world around us.

This, in turn, can move us forward faster and provide more meaningful drives towards the “G” of governance and the “E” of doing the right things for the environment.

Investors, vote with your seat, not your feet

Companies that are yet to fully embrace the ESG movement should take note. The pandemic has impacted every individual on the planet. In some form, whether directly or indirectly, hundreds of millions of those people are investors who wish to live in sustainable communities on a sustainable planet, and will increasingly hold their advisors and fund managers to deliver on those desires.

As citizens, we have the power to make an impact, not just by buying the “sustainable” option, but by actually choosing how we invest. One might call it voting with our Bursa CDS account, by learning how to use our vote during AGMs and choosing to invest in the funds that vote for ESG with their seat and not just their feet. It is easy to exit an investment in a passive financial protest to those that are not being ESG-minded, but it takes fortitude to stay invested and do what is right with our investment rights.

At Maybank Kim Eng, we take a sustainability-first approach to every deal and every investment. It’s not a new-wave realisation. Humanising financial services has been our mission for the past decade.

2021 is the year we will celebrate our 10th anniversary. We grew in parallel — Kim Eng since 1972 and Maybank Investment Bank since 1973 — and joined forces to build Asean’s most comprehensive regional footprint in 2011.

Our next decade begins with renewed optimism that we are entering a kinder, more progressive era, in which we can feel inspired to make a larger difference by being innovative, audacious and, most importantly, human.

Happy New Year. I, for one, am ready.

Ami Moris’ mission at Maybank Kim Eng Group, the investment banking arm of Maybank Group, is to humanise financial services by helping clients build more profitable and sustainable businesses that help deliver a more equitable and inclusive Asean.

Ray Choy

Regional Head of Treasury & Markets Research at CIMB’s Treasury & Markets division

2020 was indeed a historic year as the financial markets grappled with recessions and the global pandemic. I prefer the word “pandemic” because it explains the generic nature of the problem at hand, rather than confine it to “Covid-19”. In fact, Covid-19 belongs to the family of coronaviruses that causes severe acute respiratory symptoms. Thinking about its origins and generic nature allows us to internalise that Covid-19 is not a one-off despite its unique name, and this is important because it informs us that the coronavirus is both ancient and persistent. We may very well have to deal with mutations of the virus, hence the likelihood of Covid-20, Covid-21 and Covid-n in the future. Taking another step back, the coronavirus belongs to the broader issue of force majeure, which affects financial markets. Being force majeure, such events cannot be possibly predicted, but it does explain the need for preparedness and policy buffers.

Having cut interest rates aggressively in 2020, central banks are often seen to have limited policy manoeuvrability in case the situation heads south again. Similarly, massive fiscal stimulus enacted in 2020 also leaves economies limited room for further government spending in the event countercyclical policies have to be called into action. In the advanced economies, the fiscal balance, on aggregate, is expected to improve from -14% of GDP in 2020 to -7% in 2021. Gross net government debt is, however, expected to remain at around 124% in both 2020 and 2021. In emerging and developing Asia, the fiscal balance is expected to improve at a slower pace, from 9.5% of GDP in 2020 to 9.0% of GDP in 2021. Gross debt to GDP is expected to rise from 63% to 67% between 2020 and 2021. Of note, the slower narrowing of the fiscal deficit for developing Asian economies implies that fiscal spending due to the pandemic has been spread out more evenly across 2020 and 2021, as compared to the advanced economies where governments spent more in 2020. Analysing these together explains that developing Asian economies, compared with developed economies, continue to have better availability of fiscal space and persistent expansionary fiscal policies going forward in 2021.

With regard to monetary policy, the ongoing concern remains that with many nations approaching at, or under zero interest rate policy, it is difficult for central banks to enact expansionary policy. However, central banks have been particularly innovative and have been willing to reinvent standard settings in policy construction. While some traditionalists have labelled this as dangerous experimentation, I believe it is inevitable for central banks to adopt a comprehensive view of different policy frameworks as well as philosophical approaches, whether orthodox or heterodox, Monetarist or Keynesian. Therefore, whether policy options are available is a function of mindset, and there has been evidence of constructively evolving policy variants in the forms of: (i) active financial market intervention by central banks; (ii) the consideration of negative interest rate policy; and (iii) flexibilities in prudential regulations. The arguments for and against these are beyond the scope and space of this article, but monetary policy options are not limited to mere changes in interest rates and, therefore, there is little reason to be overly doubtful of central banks’ available policy tools in the event countercyclical measures are needed. Furthermore, the backdrop for increasingly easy monetary policy is possible as inflation has remained low and even if it were to rise, would not lead to a sharp rise in inflation as global excess capacity and productivity remains high.

The international political economy in 2021 is expected to unfold quite constructively, benefitting trade balances of exporting nations. The new US president will benefit from re-building global trade pacts following the insular economic nationalism promoted by Trump’s administration, and this might not be hard to achieve since the bar has been set low. The improvement in trade relations is therefore two-fold, one originating from a change of US president, and the other from structural pressures caused by the movement towards economic regionalism.

The value of the Regional Comprehensive Economic Partnership (RCEP) is not merely positive to its internal members in Asia through the reduction of tariffs, but structurally important to encourage regional growth and provide a stronger platform for political voices as the East and West continue to negotiate on trade terms. This bi-polarity and regional nationalism is not only a consequence of Trump’s foreign policies during his term, but perhaps, a natural result of the increasing economic dominance of China, and the rise in nationalism as a consequence of disenfranchisement given rising to income inequality.

The environment of stronger growth due to a recovery from the pandemic, creative destruction in the global economy, and government-assisted growth through expansionary policies will translate to risk-seeking behaviour in 2021. At the same time, liquidity creation through low interest rates, and pent up savings due to risk aversion, will support further inflows into financial markets assets. In this environment, it is likely that riskier markets such as equities, cyclical commodities and emerging markets currencies will outperform other asset classes. For bonds, high-yield bonds and lower-rated markets will benefit as they have stronger return profiles in a time when risk is of less concern during 2021, where recovery will remain the major theme. Asian bonds are attractive, given lower sovereign credit risk profiles due to the availability of fiscal space and, at the same time, these markets have above-average yields against developed markets, where most are offering near zero or even negative yields.

Against the baseline scenario for a brighter outlook, the key risk to the financial markets in 2021 will unlikely stem from poor growth or economic issues but, rather, the manner in which global relations, economies and societies are managed. Barring another force majeure event, it would be important to monitor the new US president’s handling of trade relations with China and the rest of the world, Middle East Policy and the markets’ reaction to absorbing additional bond supply as savings are transformed into government spending programmes. Fiscal programmes are good, but execution remains key and testy government-electorate relations worldwide continue to eye the equitability, effectiveness and efficiency of government stimulus. Another risk would be vaccine nationalism and its implementation, and whether that — together with the risk of a resurgence of the virus — could stymie the fragile recovery and market sentiment.

Dr Ray Choy is regional head of treasury and markets research at CIMB’s Treasury & Markets division, covering fixed income, currencies and commodities markets. The views expressed in this article are entirely his own and do not necessarily reflect the views of the CIMB Group or its subsidiaries.

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