Expect the unexpected

VACCINE is the one word to describe the hopes of 2021 while unfettered optimism is something that could just spoil the recovery party of the year.

VACCINE is the one word to describe the hopes of 2021 while unfettered optimism is something that could just spoil the recovery party of the year.

From the economy to social life and levels of carbon emission, it all depends on whether the pace of inoculation to contain the Covid-19 pandemic is fast enough. Anybody thinking that 2021 will see the return of normalcy on the back of mass vaccination is naively optimistic.

The year starts with not too gloomy an outlook or an overly optimistic view. Stock markets around the world ended the year better. Bursa Malaysia finished 2020 with an improvement of 2% compared to 2019. Wall Street finished the year with a bang, setting a new record high.

But the quality of companies that pushed the stock markets to a new high are in stark contrast, suggesting the different stock markets will experience different fortunes this year.

A combination of improved fundamentals of glove stocks and abundance of liquidity to the stimulus measures pushed Bursa Malaysia to a better finish amidst the pandemic. Technology stocks and massive printing of money by the US government buoyed Dow Jones to end 2020 with a gain of 16%.

Going forward, the performance of stock markets could spring some surprises.

While the economy is poised to recover this year, there are some suggestions that the stock market has already priced in the improvement. Unlike companies in the US, the quality of earnings of Malaysian companies is inferior.

Glove companies displayed earnings sustainability for 2020. There are not many that can show the same prowess for this year. Even the earnings of glove companies may not see growth this year. To exacerbate the situation, glove heavyweights – Top Glove Corp Bhd, Supermax Corp Bhd and Hartalega Holdings Bhd – are all in the benchmark FBM KLCI index.

The glove companies could be among the targets for short-selling activities that will be allowed again from next week. Bursa has already allowed for regulated short selling (RSS), which affects only a selected number of companies.

The suspension of the more intense intra-day short-selling by proprietary day traders has been extended to Feb 28. The suspension of short selling from March 24,2020 came at a time when the global equity markets were routed. It has been extended three times and the lifting of the RSS is viewed as the start of the return of normal rules on Bursa.

Short selling is frowned upon because it creates volatility. When markets are going through extraordinary times such as the pandemic in March, short sellers were making money from selling down the stock. Many exchanges including Bursa suspended short selling during the pandemic.

Short selling is also a tool that adds liquidity to stocks. When stocks are overvalued, traders will tend to short the stocks. To some extent, it helps to quell excessive speculation.

After glove stocks, the focus for 2021 is on vaccine stocks. The government has estimated a sum of RM3bil to be spent to inoculate the population. The total forked out on vaccines will be higher as foreign workers and other non-citizens would also need the vaccine.

But the nagging question is whether the market has already priced in the earnings potential of the stocks related to the vaccine?

Just like the glove stocks, most of the vaccine-related stocks have retreated from their highs. Some have come down by almost 40%. Anybody rushing in to buy vaccine-related counters thinking that it could repeat the feat of glove stocks better be wary.

They could be dealt with a surprise.

Unlike the glove sector where operations are predictable and highly unregulated, vaccine suppliers need various regulatory approvals even before the product can even hit the market. The cost to complete a “fill and finish” facility is less than RM30mil. But the regulatory approvals by the National Pharmaceutical Regulatory Authority to approve a vaccine can be time consuming.

The key beneficiaries for the vaccine play are seen as Pharmaniaga Bhd and Duopharma Bhd because both are government-linked companies. But there could be some surprises as both companies have yet to announce getting regulatory approvals from the Malaysian government on the vaccines that they plan to supply to the market.

The government is expecting the supply of vaccines to start entering the market next month, which is not too far away. Front liners and the elderly, who are mostly at risk from Covid-19, are to get the doses of the Covid-19 vaccine first.

But administering the vaccine and handling its logistical supply can be challenging. The US experience tells us that the logistical and administering challenges of mass vaccination is huge. The US planned for 20 million people to be vaccinated by the end of the year. However, only 2.6 million people have been vaccinated although 12.4 million doses were distributed.

Then again, there could be a pleasant surprise for anyone with a pessimistic view.

The US and other Western countries are not the best examples of how a nation should counter a pandemic. Asian countries, particularly China, were more efficient in handling the pandemic compared to the Western world. Covid-19 started from China but the fatalities and spread of the virus were less compared to the likes of the US and UK.

China has approved Sinopharm, a vaccine it developed itself, for mass vaccination. It will be interesting to see how China and other Asian countries embark on mass vaccination. They may do a better job than the US.

The outcome of the mass vaccination will determine how fast the economy recovers. Towards this end, many countries are expecting to do better than 2020. Malaysia, for instance, is expecting to see a growth of up to 7.5% this year compared to a decline of 4.5% in 2020.

Then again, there could be surprises in store.

Further lockdowns due to a new wave of Covid-19 infections could dampen growth, especially in the first half of this year. Among the bigger economies, there is more certainty for China to resume its growth of almost 8%. But economic trajectory for the US and UK is still hazy for now.

As for Malaysia, the economic rebound of up to 7.5% will all depend on what happens in these large economies.

M. Shanmugam is a former specialist editor of The Star. Views expressed here are his own.

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