Analysts recommend selective buying amid volatility and uncertainties

  • Markets
  • Saturday, 11 Jul 2020

Volatile market: The local stock market went through a volatile period in the first half of the year.

STOCKS have started the second half of 2020 in a strong position after a volatile period in the first half of the year.

Despite the retreat of the FBM KLCI on some days, the local benchmark stock index had managed to recover all its 2020 losses at where it stood yesterday. This is thanks to the strong buying interest from mom-and-pop investors as well as local fund managers that had helped push up the country’s stock market over the last few months, even as foreign funds continue to shun the local equity market.

The FBM KLCI, which is composed of the 30 largest companies on Bursa Malaysia by market capitalisation, gained 8.59 points yesterday to settle at 1,591.84 points.

As of yesterday, the index is 0.19% higher than where it was at the start of the year.

Despite the bullish momentum in recent months, scepticism remains among some analysts over the sustainability of the gains in the equity market. Among the reasons cited are expensive valuation at current levels; increase in the number of new Covid-19 cases globally; persistent geopolitical tensions and lacklustre corporate earnings.

Their projection is that the FBM KLCI will likely settle at a lower level by year-end.

Of the five brokerages polled by StarBizWeek, three have relatively more conservative estimates, expecting the FBM KLCI to settle below 1,500 points, while the two that are more optimistic project the index would be around 1,530 points by the end of 2020.

Buy selectively

Ample liquidity due to the loose monetary policies worldwide and optimism of economic recovery on massive fiscal stimulus packages and as economies reopen after Covid-19 lockdowns are major driving factors of the recent equity market run-up.

TA Research, however, cautions of a potential pullback of the market in the current quarter, citing oncoming economic and corporate earnings data in relation to the negative impact of Covid-19. The brokerage notes the end of moratorium period on loan repayments for consumer loans in September could also spell more trouble for the banks, specifically, if defaults rise.

These damning factors could contribute to a correction, TA Research says, before a rebound in later part of the fourth quarter of 2020 and a stronger 2021. It points out the rebound will be aided by more convincing signs of economic recovery from the multi-trillion-dollar global stimulus measures and massive, cheap liquidity.

“While we reckon a new bull market is already in motion and riskier assets like equities should outperform in current low interest environment, in the immediate term, investors should sell overvalued blue chips and buy selectively in this potential corrective wave until the dust settles, ” TA Research advocates in its second-half strategy report.

So, how to buy selectively in the current environment?

TA Research recommends buying into glove stocks that are benefiting from the Covid-19 pandemic; gaming/casino plays that will benefit from the lifting of the movement control order (MCO); undervalued technology stocks; fundamentally solid high beta consumer plays; property companies that will benefit from easing restrictive measures such as the loan-to-value ratio on residential properties and the removal of real property gain tax; as well as Sarawak-election stocks.

Among its Top Buy stocks are Kossan Rubber Industries Bhd, Supermax Corp Bhd, Genting Bhd, Berjaya Sports Toto Bhd (BToto), SP Setia Bhd, Serba Dinamik Holdings Bhd, Malaysian Pacific Industries Bhd (MPI), Scientex Bhd, Johore Tin Bhd and Cahya Mata Sarawak Bhd.

Its Top Sell stocks are Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd, Petronas Chemicals Group Bhd, IOI Corp Bhd and AirAsia Bhd.

TA Research maintains its 2020 FBM KLCI target of 1,450 points based on 16.4 times forward earnings, which is higher than its previous peg of 15 times forward earnings due to the sharp cut in its earnings forecast post first-quarter 2020 results reporting season.

“The higher multiple is after considering the fact greater forward multiples were prevalent in crisis periods due to cut in earnings and to take into account the growth potential once the dust settles due to the lack of earnings visibility in current forecasts, ” it explains.

CGS-CIMB Research, on the other hand, expects the FBM KLCI to end around 1,496 points based on its peg of 16 times forward earnings.

While the brokerage views the extension of the short-selling suspension on Bursa Malaysia from June 30 to Dec 31 as a positive factor, it expects concerns over domestic political uncertainty and the currently high price-earnings valuations for the market to keep gains in check.

“Given the sharp gains in the past three months, we do not discount profit-taking, which may lead to pullbacks in the gains, ” CGS-CIMB Research says in a recent note.

Prospective sectors

Overall, the domestic equity market remains highly susceptible to external shocks, Public Investment Bank Research says (Public Invest).

“It has been and will continue to be a trading-oriented one until the dust fully settles. Wild ups and downs are to be expected, which will present selective opportunities, ” the brokerage points out.

While it expects the equity market to continue to perform in the near to medium term on a liquidity-driven push, Public Invest retains its conservative stance, maintaining its 2020 year-end closing unchanged at 1,480 points based on 16.5 times forward earnings.

It says some fundamentals will be reflected amid the current exuberance.

In its second-half strategy report, Public Invest identifies manufacturing; healthcare and gloves; banks; construction; and power as some prospective sectors.

“Global economic recovery and by extension, consumption, will be a boon to the manufacturing sector, aided in part by the relatively weaker ringgit, ” it explains.

As for healthcare and gloves, while appearing relatively toppish at current levels, these sectors may continue to attract trading interest owing to the lack of fundamentally-stronger alternatives, it argues, noting it has recently lowered its call for the sector to neutral.

As for banks, while they may find the going a little tougher in 2020, a cyclical economic recovery could spark life in a sector that has yet to recover to pre-Covid price levels, Public Invest justifies.

“Construction may see trading interest, typically one used to drive economic growth given its various multiplier effects, ” it says.

“Power, particularly renewable energy-related, should gain traction with the government’s resolve toward increasing its share in the generation mix. Plantations may, however, be affected by labour-related issues owing to the government’s prohibition of foreign worker inflows till this year-end, ” it adds.

On stock picks, Public Invest favours can manufacturer Johore Tin, garment manufacturer Magni-Tech Industries Bhd, utility and construction group Mega First Corp Bhd, oil palm group Sarawak Plantation Bhd, oil and gas engineering services provider Serba Dinamik and plastic product manufacturer SKP Resources Bhd.

The brokerage also suggests the inclusion of building materials company Chin Hin Group Bhd and semiconductor producer D&O Green Technologies Bhd for the remainder of the year on the basis of recovery in economic (construction and consumption) activity.

Stay defensive

Meanwhile, Kenanga Research appears relatively more optimistic, expecting the FBM KLCI to close the year at 1,531 points, implying a forward-earnings multiple of 17.4 times.This is based on what the brokerage terms a new style of valuation. Applying a “finer” brush, it uses 16.2 times forward earnings for FBM KLCI excluding the two glove component stocks; 36 times forward earnings for Top Glove Corp Bhd alone and 43 times forward earnings for Hartalega Holdings Bhd.

“We caution that the path from here to 1,531 points will be volatile, not least because the market’s implied optimistic, but questionable assumptions about the containment of the pandemic’s second wave and robust earnings recovery will be tested in the months ahead, ” Kenanga Research says in its strategy report.

It points out that the higher 16.2 times earnings multiple applied to FBM KLCI (ex-gloves), compared with its previous target of 15.9 times, is mainly to account for an extended period of low interest rates, coupled with abundant liquidity.

“However, as the equity market risk premium remains elevated – a reflection of the volatile path ahead moving towards next year’s recovery – we recommend a barbell strategy by sticking with the defensives that can be found in dividend yielders, utilities and beaten-down consumers names to anchor portfolios, while also selectively overweight cyclicals in the technology and construction space, ” Kenanga Research recommends.

The brokerage top stock picks for the current quarter are BToto, engineering and construction company Gamuda Bhd; electronics manufacturer JHM Consolidated Bhd, power company Malakoff Corp Bhd, technology group MPI, consumer play Power Root Bhd, banking group RHB Bank Bhd, construction play Sunway Construction Group Bhd, national utility giant Tenaga Nasional Bhd (TNB) and Top Glove.

Similarly, AmInvestment Bank Research is mildly positive on the Malaysian equity market for the second half of 2020, projecting an end-2020 FBM KLCI target of 1,530 points based on 18 times forward earnings.

“We believe there is a case for the FBM KLCI’s multiple to stay elevated to reflect the robust domestic liquidity driven by the risk-on sentiment globally triggered by the massive monetary and fiscal stimulus packages put in place by central banks and governments around the globe, optimism on economy reopening and the news flow on vaccine development, ” AmInvest argues.

“Also helping, is the reality that risk-free assets, that is, cash and Malaysian Government Securities, are hardly generating any positive inflation-adjusted yield, ” it adds.

AmInvest is overweight on the automobile, consumer, glove, healthcare, power, real estate investment trust and technology sectors.

Its top buy stocks are Maybank, TNB, telecommunications company Axiata Group Bhd, oil and gas play Dialog Group Bhd, RHB Bank, Kossan, stock exchange operator Bursa Malaysia Bhd, technology company Inari Amertron Bhd, utility and infrastructure conglomerate MMC Corp Bhd and automotive parts manufacturer MBM Resources Bhd.

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