Monday 29 May 2023
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This article first appeared in Capital, The Edge Malaysia Weekly on June 15, 2020 - June 21, 2020

IT has been a month since the Malaysian economy was kick-started under the Conditional Movement Control Order (CMCO) that came into effect on May 4, allowing almost all economic sectors to operate.

The economy, which grew 0.7% in the first quarter of 2020, was practically at a standstill in April and is forecast to see a “deep contraction” in the second quarter, according to Bank Negara Malaysia. An improvement in economic growth is expected in the second half, however, and a further acceleration of that growth is anticipated in 2021.

On the global front, the International Monetary Fund expects growth to contract sharply by 3% in 2020. Assuming that the Covid-19 pandemic fades in the second half of the year and containment efforts can be gradually unwound, the global economy is projected to grow 5.8% next year.

From an investing standpoint, the current modus operandi of investors is to buy direct beneficiaries of the pandemic and avoid those that are not. As a result, the valuations of glove counters have shot through the roof; on the flip side, there has been a massive wipeout in the market value of tourism and travel-related counters.

But taking a longer-term view — the next five years at least — and premised on an economic recovery in both the domestic and global economies, which stocks or sectors could investors buy into? The Edge spoke to fund managers — both present and former — for their opinion.


Companies with sound fundamentals

Pankajkumar Bipinchandra, a former director of investment at KSK Group Bhd, says investors could look into fundamentally sound companies that have been affected by negative sentiment brought about by Covid-19, such as automotive players UMW Holdings Bhd and Bermaz Auto Bhd.

According to Bloomberg data, despite having recorded a return on equity (ROE) of 14.9%, UMW saw its share price fall 55% y-o-y to RM2.28 last Wednesday. The company distributes Toyota and Lexus vehicles in Malaysia and has a 38% stake in Perusahaan Otomobil Kedua Sdn Bhd (Perodua).

Similarly, Mazda distributor Bermaz Auto, which recorded an ROE of 30.3%, saw a 42% decline in its share price to RM1.33 last Wednesday.

The MCO has not made things easier for automotive players, with data from the Malaysian Automotive Association showing that only 141 vehicles were sold in April this year, barely 0.3% of the monthly sales of 49,935 units a year ago.

Interestingly, Pankajkumar is also positive on the property sector, which he reckons will see a recovery — not immediately, but in a year or two. As to why he picks the property sector when most tend to avoid it, he cites deep value investing, which focuses on securities with the lowest valuation multiples in the market.

“If you look at a stock like S P Setia Bhd, it’s trading at a price-to-book of 0.3 times. So, it’s quite attractive in that sense. Also, their developments are more of townships rather than high-rise properties, so they are kind of insulated from the oversupply and overhang situation in the property market that we are seeing, especially among high-rise developments,” he says.

Meanwhile, TA Investment Management chief investment officer Choo Swee Kee says fund managers are focusing on two key terms: “recovery” and “the new normal”.

“In the recovery space, tourism-related stocks directly and badly hit by Covid-19 have lots of room for recovery. This would include stocks such as Malaysia Airports Holdings Bhd, AirAsia Group Bhd and Genting Malaysia Bhd, whose business practically stopped for almost a calendar quarter.

“This pandemic has also caused changes in people’s behavioural pattern and business operations. The common factor here is the use of technology-enhanced infrastructure such as the internet, e-payment systems, digital IDs and facial recognition. Companies that touch on this area include the main telco players Maxis Bhd, DiGi.Com Bhd, Axiata Group Bhd and Telekom Malaysia Bhd as well as MyEG Services Bhd, GHL Systems Bhd and Revenue Group Bhd,” he says.

Private investor and former investment banker Ian Yoong is on the same page as TA’s Choo. He says the Covid-19 pandemic will be a catalyst for digitalisation in government services, shopping, education and spectator sports.

“MyEG is an attractive investment provided it obtains renewal of its master concession, which is due soon. It is the leading e-services provider in Malaysia. The stock is trading at 11 times PER (price-to-earnings ratio) for FY2020 and 9.8 times for FY2021, based on forecast earnings,” he says.

Yoong also likes OpenSys (M) Bhd, a low-profile tech company that is the leader in the digitisation of financial services.

“This enables banks to reduce their dependence on branches to improve geographical presence. Its teller cash recyclers and cash recycling ATMs are used by many banks in Malaysia. This hardware reduces contact with bank staff. OpenSys is trading at 9 times PER for FY2020 and 8.5 times for FY2021, based on forecast earnings,” he says.

Kamal Mustadza, a fund manager at Value Partners Asset Management Malaysia, says a thematic play on digitalisation and logistics would be interesting areas to focus on in the coming years.

“With acceleration in digital transformation and growth in e-commerce remaining intact, there is no doubt that the likes of logistics player GD Express Carrier Bhd, industrial real estate investment trust Axis REIT, port operator Westports Holdings Bhd, telecommunications provider TIME dotCom Bhd and payment solutions provider GHL Systems are among the key beneficiaries of these underlying trends,” he says.


Sector perspective

UOB Asset Management (Malaysia) Bhd CEO Lim Suet Ling says the banking sector could see a recovery once the economy improves.

Lim says: “In the short term, the banking sector would bear the brunt of an economic slowdown via rising loan delinquencies and anaemic loan demand. In addition, banking profits are also under pressure from weaker net interest margins as a result of the rapid decline in interest rates. The pressure on near-term profitability is partly reflected in valuations, with many banks trading at multi-year lows in terms of price-to-book value ratios.

“Given the fiscal and monetary stimulus measures announced, we expect the economy to recover when the worst of Covid-19 is behind us. The fate of the banking sector is closely tied to the economic cycle. Just as banks are negatively affected when the economy heads into a downturn, the fortunes of banks are expected to improve in a cyclical recovery as the pressure from credit cost recedes and loan demand picks up.”

Meanwhile, Lim remains cautious on the property sector because of the overhang.

“There [is also the question] of whether Covid-19 would have a long-term negative effect on the demand for office and retail space. It is possible that companies will reduce office space demand, owing to the emergence of the work-from-home culture post-[the pandemic].

“Even before Covid-19, we were already [keeping a watchful eye on] the potential increase in long-term supply, especially in the office space,” she says.

Amundi Malaysia head of equities Andrew San says the types of businesses that the firm likes have become more concentrated as a result of the Covid-19 impact.

“The impact of Covid-19 on our process of investing in long-term winners has only made us more discerning in our selection of stocks. That is, the benefit of the doubt given when analysing the resilience of a company and the prospects of the industry it operates in has all but disappeared.

“As a result, the list of sectors that we avoid is even [longer], while the types of businesses that we like have become more concentrated,” he says.

San’s list of businesses to avoid includes wireless telco players, property developers and palm oil producers.

“We added retail REITs to the [avoid] list because of the speed of e-commerce adoption post-Covid-19, and small to mid-cap construction players as a result of the continued political uncertainty.

“[For the telco sector,] we continue to like fibre asset owners, owing to the domestic 4G expansion and 5G implementation requiring fibre connection with telco towers, selected niche banks for their better risk management compared with their larger counterparts and higher growth potential, and food manufacturing export companies for the continued rise in demand for halal-certified foods and general food security globally,” he says.


Will the market rally be sustained?

Last Tuesday, the FBM KLCI closed at 1,507.69 points, the first time the index has ended the trading day past the 1,500 mark since Feb 27. Market watchers attribute the reaction to the announcement of Malaysia’s short-term recovery plan and expectations of the lifting of the MCO on June 9, given the declining number of Covid-19 cases seen in the country.

The benchmark has rallied 16% since the start of April, despite expectations that corporate earnings will see a larger decline in the second quarter.

This divergence is not exactly unique to Malaysia — in the US, the Standard & Poor’s 500 index has risen 38% since March to 3,080.82 points last Tuesday, despite the country’s charting the world’s highest number of Covid-19 cases, its unemployment rate being close to 15% and the recent civil unrest sparked by public outrage over the death of George Floyd, an unarmed African-American man who was killed while in police custody.

But is the market rally expected to be sustained? Pankajkumar says this is a liquidity rally led by US markets and the stimulus from the US Federal Reserve.

“What the Fed is doing is effectively telling the market that there is no price for risk. Everything is risk-free because, at the end of it, the Fed is there to buy from you. We have to ask what the role of the Fed is at the end of it. Is it there to ensure an orderly market or to provide a backstop for junk bonds and corporate debt?

“We cannot associate a bull market with an economy that is in recession; it doesn’t make sense. Sooner or later, something has to give; and sooner or later, the market will again correct. There is so much that liquidity can do for the stock market, [but] at the end of it, fundamentals will have to take precedence, and the fundamentals will dictate where stock prices should be.”


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