This article first appeared in Capital, The Edge Malaysia Weekly on May 6, 2024 - May 12, 2024

THE Wall Street adage of “Sell in May and go away” may not hold true this year as brisk market activity on the local bourse indicates that investors are not going away just yet.

The saying is based on the fact that stocks normally perform best in the six months from November to April, compared to May to October when fund managers typically have their summer break, a belief further reinforced by the steep market declines that have occurred during this period.

However, analysts and fund managers say that instead of selling in May and turning defensive, the opposite appears to be true for now as investors seem to be adopting a risk-on strategy.

One reason for the risk-on mode is the more subdued geopolitical tensions in the Middle East. Another is that expectations of an earnings recovery this year seem to outweigh the uncertainties over the US Federal Reserve rate cuts.

“There is a risk-on sentiment among investors because the geopolitical tensions have subsided somewhat. That is the biggest risk to the market, that it might escalate into a regional war [in the Middle East],” says Areca Capital Sdn Bhd CEO Danny Wong.

Tensions between Iran and Israel seem less heated since the recent tit-for-tat air strikes, while a potential ceasefire between Hamas and Israel is currently being negotiated.

“It is very difficult to predict how this will pan out, but this also means investors will have to be reactive and continue investing based on the current situation,” says MIDF Research head of research Imran Yassin Md Yusof, pointing to the geopolitical conflict as a major downside risk for markets this year.

The local market has been on an upward trend with the FBM KLCI reaching a two-year high of 1,582.66 points on April 29 before easing the following day to 1,575.97. At the close last Thursday, the benchmark stood at 1,580.30, up 8.6% year to date.

Market consensus has the FBM KLCI ending the year at 1,680.80 points, which appears optimistic given that the benchmark closed below 1,500 points at end-2023 and end-2022, a reflection of the market’s sub-par performance over the past few years.

“It seems that there is a boost of optimism this time around, which may have been supported by expectations of US rate cuts [which improves sentiment] and robust economic growth [as an extension of good corporate earnings]. This could have some self-fulfilling tendencies as the FBM KLCI climbs higher and volume increases beget further interest in the market,” says Imran.

Fund managers believe that investors are buying forward in anticipation of the earnings recovery expected in the second and third quarters of this year.

While there were some market jitters recently after the Fed delayed its expected rate cut in June on account of inflation being sticky, the postponement of the policy decision was expected, says Wong.

“It is not a U-turn in policy, but just a delay in timing [of rate cuts]. This should not impact those investing for the long term,” he observes.

While some have attributed the steady rise in the local benchmark index to foreign fund inflows, foreign funds were net buyers in the first two months of the year but net sellers in March and April. “This suggests that the rally in the FBM KLCI is probably due to domestic conditions rather than anything else,” Imran opines.

Based on MIDF Research’s fund flow report for the week ended April 26, however, foreign investors turned net buyers on Bursa Malaysia, transacting a total of RM292.2 million during the week, thus ending eight consecutive weeks of net selling.

On the other hand, local institutional investors continued to be net buyers for the ninth consecutive week, with transactions amounting to RM143.3 million. In contrast, local retail investors continued to be net sellers, net selling RM435.5 million worth of shares for the week ended April 26, marking seven consecutive weeks of net selling.

Fortress Capital Group founder and CEO Datuk Thomas Yong is cautiously optimistic about the local market despite expectations of higher-for-longer interest rates and developments in the Middle East. His confidence stems from his belief in Malaysia’s sound fundamentals and low foreign shareholding in local equities.

“We are not making any big changes towards a defensive strategy but have instead moderated portfolio compositions on affected sectors,” he explains, adding that there are thematic trading opportunities for investors with a higher risk appetite.

UOB Kay Hian Malaysia director of strategy Vincent Khoo says that while the research house has turned tactically defensive because of the typical summer lull in global equities during this period, he expects the market to trend up by the third quarter of 2024 in view of the anticipated US interest rate cuts.

“The environment remains positive for soft commodities, especially crude oil, so we believe that selected oil and gas stocks should outperform. There are also still some trading opportunities available, one of which is the 1Q reporting season,” he offers.

Brent crude has traded between US$80 and US$90 a barrel in the last few months. During the peak of the Middle East tensions, some analysts forecast that prices could again breach US$100 a barrel, but that has yet to come to pass.

MIDF’s Imran says the research house is sanguine about the country’s economic prospects and has maintained its expectations of Corporate Malaysia’s earnings growth potential. The firm believes a recovery in trade will continue to be an investment theme this year.

“Given that we expect external trade to see a recovery this year, we opine that trade-related stocks, such as logistics and ports, will benefit from this. Furthermore, we expect freight rates to stabilise after hitting bottom in mid-CY2023, coupled with an anticipated recovery in shipment volume due to the current affordability of freight rates,” he says.

Areca Capital’s Wong says he has adopted a risk-on strategy, although selectively. He is positive on the manufacturing sector, including the healthcare subsector, because of the weak ringgit, which is expected to give exports a boost. But he is a bit more cautious about the semiconductor industry.

“We buy some, but not in a big way. The orders [for the sector] will come in from now on but this should only be reflected in the earnings from the fourth quarter,” he says.

Analysts and fund managers are also positive on the construction sector, premised on the higher development expenditure forecast in the 12th Malaysia Plan Mid-Term Review.

“We maintain our view that the 12MP Mid-Term Review has given more prominence to the construction sector. This is based on the planned development expenditure and the expectation that the government will spend about RM90 billion per year for the remainder of the 12MP period,” says Imran.

“Meanwhile, we can expect further upside should there be an announcement on the rollout of large rail projects such as the MRT3, Penang LRT and the proposed revival of the KL-Singapore high-speed rail (HSR) project.”

As for the consumer products and services sector, it appears to be the least favoured because of inflationary pressures and in anticipation of the potential fuel subsidy rationalisation, which would impact consumer spending and limit earnings growth.

Meanwhile, Yong suggests that investors who have a lower risk appetite and would like to adopt a more defensive strategy should consider looking at fundamentally sound companies that consistently offer decent dividends.

“In particular, we prefer to look for companies that rely mostly on domestic revenue, have less exposure to external factors and with a cost structure that is dominated in the local currency. Based on these, we think the banking, real estate investment trust, healthcare and utility sectors are good candidates.” 

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