MALAYSIAN shares continued their good run in the first week of June, fuelled by liquidity and optimism over economic revival as global Covid-19 lockdowns ease. This is in tandem with global market trends.
With the bulls in charge, the benchmark FBM KLCI finally breached the 1,500-point level over the week.
It gave up some gains yesterday to end at 1,556.33 points. At this level, the index has gained about 28% since the movement control order (MCO) was enforced on March 18 to contain the spread of the Covid-19 pandemic in Malaysia.
The question remains on how long this bullish momentum can last, and how much higher it can go.
Amid the strong market rally, CGS-CIMB Research now says it sees a blue-sky scenario, with the FBM KLCI potentially peaking above 1,600 points in the short term, assuming the liquidity-driven rally continues.
“The FBM KLCI is now trading at a one-year forward price earnings (PE) of 16.5 times, which is one standard deviation above its historical three-year average PE.
“Our analysis revealed that since 2004, the index has traded up to 2.5 standard deviation above its three-year mean, ” explain CGS-CIMB analysts led by Ivy Ng.
So, the FBM KLCI could hit as high as 1,581-1,628 points, based on the brokerage’s estimate on the 2021 index earnings, if the index re-rated to as high as two or three standard deviations above its three-year average mean.
“The market has priced in the optimism of a recovery in earnings post Covid-19, but valuations could re-rate further if more liquidity enters the stock market, ” Ng says.
What are the risks?
Nevertheless, there are still risks that could stop the rally.
“As we believe the current rally is driven by the stimulus measures and the prevailing low interest rate environment, we think the reversal of these measures or a tightening of monetary policy could lead to profit-taking in the market, ” Ng says.
“Other risks are slower-than-expected economic recovery in Malaysia and globally; weaker-than-projected corporate earnings growth; political instability; sharp drop in global markets; and measures to prevent the stock market from overheating; as well as the current six-month loan moratorium, which will end in September; and the temporary measure to suspend short-selling, which is due to end on June 30, ” she adds.
Its base-case target for the FBM KLCI is to end at 1,348 points, based on 14.5 times PE.
Ahead of fundamentals
Meanwhile, Eastspring Investments Bhd chief investment officer Doreen Choo maintains her view that the local equity market has run ahead of fundamentals.
She tells StarBizWeek investors seem to have looked past the inevitable economic fallout from the Covid-19 pandemic.
“The government’s fiscal and monetary stimulus will provide some temporary relief for individuals and businesses, but the pandemic’s impact on demand, supply chains disruptions and loss of employment will likely result in a challenging ‘future new normal, ” Choo explains.
“Progressive cuts in interest rates may also have fuelled the switching out from cash into other asset classes for better returns, ” she adds.
But for the current rally to be sustainable, Choo says, the drivers will be the availability of a credible vaccine, and the ability for people to go about their normal lives without the fear of being infected by Covid-19.
While Malaysia’s gross domestic product (GDP) for the first quarter came in better than expected, with a growth of 0.7%, Eastspring expects to the full brunt of the Covid-19 pandemic and the impact of the MCO measures to be evident in the second-quarter GDP data.
“We remain cautious as we believe the impact on the economy will be felt over the next few quarters.
“We should start seeing a positive economic turnaround in the second half of 2020, but that is assuming there will not be any new wave of outbreak and national lockdown, and we continue our progress to resume normal activities, ” Choo says.
Nevertheless, she notes, a V-shaped recovery is unlikely.
It is more likely a U-shaped recovery, but in general, there is little doubt that Malaysia will be in recession in 2020.
“As the situation is still evolving, it is uncertain how long this pandemic will last and whether a vaccine will be successfully developed and made readily available to the public, ” Choo says.
“Businesses will need cash-flow support to ensure they do not close down permanently.
“Workers will need to adapt to the new normal by developing new skillsets to meet the needs of the post-Covid-19 world.
“Governments will need to manage the trade-off between curbing a resurgence and avoiding a deep and prolonged recession, ” she adds.
She expects the current low interest-rate environment to continue to be supported by expectations of weaker economic growth, lower inflation outlook and loosening global and domestic monetary policies, exacerbated by the Covid-19 pandemic.
Given the current circumstances, Choo believes sectors that would do well will be those involved in essential goods and services, such as rubber gloves (and other protective gear products), medical device components, and sanitising products.
The demand for these items will continue even if a vaccine is produced as countries globally will look to build inventory in preparation for the next pandemic and due to improved cleanliness habits, she says.
In general, Choo expects the local equity to remain volatile for a while, and hence, diversifying one’s portfolio will be important.
“Fixed income assets are preferred to generate steady returns in times of uncertainties but on a longer-term basis, the risk-reward for equities are looking attractive, ” Choo says.
She notes the Malaysian equities market is low-beta in nature, and hence, other regional markets may provide higher returns on the back of an anticipated economic recovery.
AllianceDBS Research advocates staying defensive amid subdued economic prospects and domestic political uncertainties.
“We believe this liquidity-induced equity market rally may come at the expense of long-term productivity, sustainability and financial stability which are all critical for rational asset valuation, ” the brokerage says in its recent report.
Noting the coast is not yet clear, AllianceDBS cites the escalating US-China tensions could undermine an expected economic recovery in the second half of 2020, and further exacerbate the uncertainties for the global economy that is already struggling to recover to pre-pandemic levels.
Domestically, political turbulence remains a key concern, it says, pointing to the razor-thin majority held by the ruling coalition government, which may result in government bills being rejected when the Parliament convenes from July 13 to Aug 27.
“This does not bode well for the country’s economic well-being when full efforts are needed to tackle the Covid-19-induced economic slowdown, ” AllianceDBS explains.
The brokerage expects the FBM KLCI to end the year at 1,425 based on 16 times forward earnings.
“We remain positive on stocks with resilient business models that are relatively unaffected by Covid-19 and high-yielding names which are more likely to outperform in a low interest rate environment, ” AllianceDBS says.