Market is likely still looking for bottom amid rising risk of recession


  • Markets
  • Saturday, 04 Apr 2020

As for UOB Kay Hian Research, the view is that while the FBM KLCI could ease again in the near term, the index is unlikely to set new lows this year.

INVESTORS have been warned: the worst is yet to come.

After completing their worst quarter since the 2008/09 Global Financial Crisis, global stock markets could potentially register further losses in the days ahead due to the economic fallout of the coronavirus (Covid-19) pandemic, according to several prominent fund managers.

Veteran investor Jim Rogers (pic), for one, believed another rout of global stocks is imminent despite recent attempts of financial markets trying to stage a recovery. And that’s because of the “triple whammy” of the Covid-19 economic damage, high debt levels and low interest rates that would hurt when they rise, he said.

Speaking to Bloomberg over the week, the chairman of Rogers Holdings Inc said he expected “the worst bear market” in his lifetime to take root in the next couple of years.

Jim RogersJim Rogers

Rogers, who had been saying a bear market was imminent since 2018, recently said the impact of Covid-19 on economies would not be over quickly because there had been a lot of damage, and a gigantic amount of debt had been added into the system.

Similarly, Kirby Group CEO Soren Thorup Sorensen recently said equity markets at present remained too volatile to justify any bargain hunting, stressing this was not the time to be brave.

As a long-term investor, the best response was to “sit still and weather the storm”, said the fund manager who manages an US$18bil portfolio, and oversees the fortune of Lego billionaires.

Global stocks, as measured by MSCI World Index, have lost about 24% since the start of the year, resulting in many companies now trading below fair value.

Equities in Asia were similarly hammered, with the benchmark MSCI Asia ex-Japan Index losing about 21% year to date.

In Malaysia, the FBM KLCI, which is made up of the 30 largest companies on the Bursa Malaysia by market capitalisation, has fallen by about 16% year to date.

The benchmark index ended at 1,330.90 on Thursday, after having gradually rebounded from an 11-year low of 1,219.72 on March 19.

How low can it go?

The rebound of staged by FBM KLCI, however, is unlikely to be sustainable, according to some brokerages, which think that the index has yet to bottom out this year.

Affin Hwang Capital Research, for one, expects the FBM KLCI to bottom at 1,008.

Hong Leong Investment Bank (HLIB) Research, for another, sees the bottom at between 1,029 and 1,089.

According to Affin Hwang Capital, the recent rebound of the FBM KLCI may be temporary due to the concerted monetary stimulus by central banks globally, and the suspension of short-selling activity and relaxation of margin-financing rules domestically.

“We believe the market is downplaying the large economic impact of Covid-19 and overestimating a revival of the economy once activity resumes, ” the brokerage says.

It notes that during the global financial crisis, the FBM KLCI troughed at 1.3 times price-to-book value (PBV), but the index’s return-to-equity (ROE) was superior then, bottoming at 10.75%.

Adjusted for today’s ROE, it explains, the implied trough PBV is near the 1.0-time level, which is the brokerage’s new end-2020 FBM KLCI target of 1,008.

HLIB Research, on the other hand, calls the recent market rebound a “dead cat bounce”, saying a W-shaped trajectory is likely, with a bottom for the FBM KLCI at 1,029 to 1,089, based on the Global Financial Crisis experience.

“Since its recent low on March 19, the FBM KLCI has rebounded by as much as 10%. Past bear markets have shown that it is not uncommon to see a ‘dead cat bounce’ with magnitudes ranging from 10%-13%, ” the brokerage explains.

“We are inclined to believe the market will have a W-shaped trajectory and we are probably now at the first half of that W, ” it adds.

The impact of Covid-19 aside, HLIB Research points out, low oil prices, which have negative impact on Malaysia’s fiscal position, ringgit and the market, as well as possible political uncertainty resurfacing are key headwinds for the equities in the second quarter of this year.

The brokerage says it will only turn buyer when the FBM KLCI nears its bottom estimate.

It maintains its year-end FBM KLCI target at 1,350 based on 14.5 times price-earnings (PE), which is the Global Financial Crisis mean, tagged to mid-2021 earnings.

Meanwhile, Kenanga Research points out that during the 1997/98 Asian Financial Crisis, the FBM KLCI fell to the lowest PBV ratio of 0.64 time. This ratio corresponds to 645 points on the FBM KLCI, which happens to be the 76.4% Fibonacci retracement (a key-support) level using data from 1995 to 2020, it says.

The brokerage reckons there is a possibility of the index falling to such a low level again in the event the Covid-19 pandemic is prolonged, which could lead to a collapse of the financial system that requires a bailout.

“This, however, is not our base case. On PBV terms, therefore, we believe 1,220 to be a secure fundamentally justifiable level for long-term investors. Technically, worsening sentiment may take the index down to 1,090, being the 76.4% Fibonacci retracement support level (using data since the 2008 GFC lows), ” Kenanga Research says.

It points out that overwhelming pessimism and fear may have been largely priced into the sharp sell-off in just about everywhere. Hence, it finds 1,220 to be a solid fundamental support based on a PBV ratio of 1.2 times – a level last seen during the Global Financial Crisis.

When the market recovers, Kenanga Research says, the upside to FBM KLCI on a six to 12 months’ investment time horizon is 1,463, applying a two-standard deviation below-mean multiple on reduced earnings expectations.

As for UOB Kay Hian Research, the view is that while the FBM KLCI could ease again in the near term, the index is unlikely to set new lows this year.

“We expect the FBM KLCI to ease again in line with the profit-taking mode in the United States, following its 10% bounce from the lows, although we gauge that the FBM KLCI would not set new lows as the US credit market is stabilising, ” the brokerage explains

It maintains its end-2020 FBM KLCI target at 1,440, implying target PE multiples of 15.6 times the estimated earnings for 2020 and 14.5 times that for 2021, and a target PBV ratio of 1.26 times.

While the rollout of the RM250bil stimulus package by the government is aimed at cushioning the economic pains of the Covid-19 fallout, the initiative is not expected to help corporate earnings, says CGS-CIMB Research.

“The stimulus package is unlikely to boost earnings. Overall, the net impact on FBM KLCI earnings is likely to be negative, as large corporations are pitching in to combat the impact of Covid-19, ” the brokerage explains.

It keeps its end-2020 target at 1,449 points, based on forward PE of 14.6 times, for now, pending a review of its earnings estimates.

Take shelter

Amid the continued volatility, analysts recommend going defensive and be selective on dividend-paying stocks.

“In a low interest-rate environment and heightened earnings risk, we recommend riding out this challenging year by taking a higher-than-usual exposure to non-discretionary consumer names, and yielders anchor portfolios, ” Kenanga Research says.

“High ROE consumer plays whose share prices have recently been hit badly by concerns over the impact of Covid-19 on sales are potential candidates, ” it adds.

For post-Covid-19 earnings recovery, Kenanga Research recommends exposure to the technology sectors as growth resumes when the supply chain disruption ends and demand returns. Being export driven, this sector, it points out, will benefit from the weak ringgit, and it is also free of risks related to domestic politics and policy uncertainties.

Kenanga Research’s top picks for the second quarter are D&O Green Technologies Bhd, FRASER & NEAVE HOLDINGS BHD, Hartalega Holdings Bhd, KESM INDUSTRIES BHD, MEDIA CHINESE INTERNATIONAL LTD, Malaysian Pacific Industries Bhd, PADINI HOLDINGS BHD, Power Root Bhd, QL RESOURCES BHD and TELEKOM MALAYSIA BHD.

As for Affin Hwang Capital, the top picks are Top Glove Corp Bhd, GENTING BHD, QL Resources, Kossan Rubber Industries Bhd, YTL POWER INTERNATIONAL BHD, INARI AMERTRON BHD, Scientex Bhd, SUNWAY CONSTRUCTION GROUP BHD, Taliworks Corp Bhd and MSM Malaysia Holdings.

Based on its yield-driven interim strategy, UOB Kay Hian Research’s top picks are Astro Malaysia Holdings Bhd, Dialog Group Bhd, Digi.com Bhd, Genting Malaysia Bhd, Tenaga Nasional Bhd (TNB), BRITISH AMERICAN TOBACCO (M) BHD (BAT), Duopharma Biotech Bhd, Globetronics Technology Bhd, Magnum Bhd and Scientex.

HLIB Research’s top picks are those that have a relatively more resilient business nature and strong balance sheet to weather the storm such as TNB, Sunway Bhd, TIME DOTCOM BHD, KPJ Healthcare Bhd, Axis Real Estate Investment Trust and MBM RESOURCES BHD; high-dividend yielders with reasonable certainty such as BAT and Hup Seng Industries Bhd; and beneficiaries from the Covid-19 pandemic such as Top Glove (direct) and BURSA MALAYSIA BHD (circumstantial).

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