THE prospects for emerging markets are buoyant as they will likely get a lift from Americans receiving US$1,400 cheques from the US government and putting the money into the stock market.
Coupled with the export-driven recovery in China, hopes are that a virtuous cycle will be set into motion, leading to a sustained global recovery.
While the China recovery story has led to a tidal wave of investment funds into China, the expected rally in other markets will provide the second chapter to this thematic play.
However, beware of overstretched valuations; as the Malaysian economy struggles to recover, there may not be many sectors for investors to focus on, currently.
More than 150 million Americans are expected to receive the higher payment of US$1,400 compared with US$600 earlier this month.
Data suggests that anyone who gets this monetary boost is more likely to put it in into the market; check recipients across all income groups in the United States traded about 30% more in the first 10 days of this month compared with the beginning of December, said Bloomberg, quoting data from Envestnet Yodlee show.
Amid the Covid-19 pandemic when many sectors are still suffering, the main driver of growth in the Malaysian economy may remain the export sector.
Until the recovery gets onto firmer ground with a reopening of all economic sectors, investors’ interest will revolve around sectors that continue to provide overt opportunities.“This narrow focus allows valuations to rise to levels unimaginable compared with prior to the Covid-19 outbreak, ’’ said former Inter-Pacific Securities head of research Pong Teng Siew, cautioning on some “sky high and preposterous” valuations.
Malaysia’s export sector is estimated to rise by 3.3% in 2021, due to the improved economic performance of its trading partners, especially China, said Socio Economic Research centre executive director Lee Heng Guie.
Malaysia’s exports of technology, electronics and electrical products as well as commodities, have been helping to lift overall exports in recent months.
This was thanks to demand for memory, information technology applications and electrical equipment during the Covid-19 outbreak, while palm oil prices have firmed.
As long as Covid-19 cases remain high, and the movement control order (MCO) 2.0 is extended, investment on Bursa Malaysia will be volatile based on sentiment and liquidity plays.
Equities are likely to benefit from an environment of low deposit rates, ample liquidity and enormous stimulus packages globally coupled with expectations of vaccinations against Covid-19.
Long-term portfolio managers look beyond the short-term and position on a recovery theme, based on fundamental factors, said Areca Capital CEO Danny Wong.(pic below)
Apart from the technology sector, other key recovery sectors include selective exporters, financials as well as the consumer, infrastructure and utilities segments.
The risks include uncontrollable Covid-19 outbreaks, a longer-than-expected recovery, ineffectiveness of vaccines against Covid-19 and any major policy switch.
There is concern that a strengthening ringgit against the dollar could dampen the earnings of export-led companies.
As most exporters are doing well from pent-up demand, the main drawback could be ringgit strength, said Rakuten Trade head of research, Kenny Yee, (pic below) adding that regional currencies especially the yuan, will also likely strengthen against the dollar.
The dollar could remain weak, as the US corporate outlook has darkened with a likely roll-back of corporate tax cuts and a more socialistic approach by the US executive, said Etiqa Insurance & Takaful chief strategy officer Chris Eng.
While the ringgit, which continues to benefit from the strong global trade recovery, has had a good run against the dollar, in recent months, there could be a mild pullback before making a break below RM4 to the dollar.
The ringgit could also weaken if there is a quick move higher in US Treasury yields and if foreigners sell off Malaysian bonds, said Hong Leong Bank managing director, global markets, Hor Kwok Wai.
There are some who see the ringgit remaining weak, overall.
“The ringgit strengthening is only relative to the dollar due to the massive quantitative easing (which is government bond buying to support markets) of the Federal Reserve; it remains weak relative to the yuan, Aussie dollar, Singapore dollar and Thai baht, ’’ said Pong.
There should be more optimism for emerging markets versus US markets, going forward, as the trade wars between the United States and China should quieten down.
Foreign funds may be expected to flow into Asia, as the new US administration is said to be more “Asia friendly.”
While there could be sporadic mispricing, buoyant conditions remain from easy credit flowing into equity markets and low interest rate policies globally.
In current times, exuberant investor and business sentiment may not be “a bad thing, ” and will likely be tolerated, said Fortress Capital CEO Thomas Yong.
Overall, a selective and long term approach towards equities on Bursa Malaysia is advisable; while the economy struggles to recover, and yet as a part of Asia, the country stands to attract foreign inflows, stability on all fronts is absolutely vital.
Yap Leng Kuen is the former business editor of StarBiz. Views expressed here are the writer’s own.