KUALA LUMPUR: AmInvestment Research has downgraded its end-2021 FBM KLCI target to 1,695 to mitigate the distortion arising from earnings spikes from glove makers and also due to the rapid rise in global bond yields.
In its strategy report on Monday, it said the projection of 1,695 was at a discount to its five-year historical average of 18 times (vs. 1,770 based on 17.5 times its 2021F earnings projection previously).
Firstly, it said the discount was to mitigate the distortion arising from earnings spikes from glove makers, that is Top Glove, Hartalega and Supermax in 2021F due to the abnormally high glove selling prices that are not recurring.
Secondly, this was to reflect the rapid rise in bond yields globally, led by US Treasuries in recent weeks (while it is debatable if it is a tell-tale sign of economic reflation or runaway inflation, or both). Bond yields typically have an inverse correlation with equity valuations.
AmInvest Research continues to believe that the recovery-focused investment theme from end-2020 will extend well into 2021F.
“Investors will continue to accumulate recovery plays, i.e. fundamentally strong names in the banking, power, oil & gas, consumer, REIT and transport sectors, while lightening their positions in pandemic plays, i.e. glove makers and selected excessively priced technology names.
“The fundamentals of banking stocks should improve in line with the economic recovery.
“While clarity is still lacking with regards to the extent of the irreversible damage the pandemic has inflicted on businesses, and hence asset quality of banks, we take comfort that banks have started to make pre-emptive provisions in the form of management overlays, in addition to provisions based on changes to macroeconomic factors, ” it said.
AmInvest Research said other key sectors that are poised to benefit from the recovery are power (increased demand for electricity, particularly, from the commercial and industrial segments), oil & gas (higher crude oil prices).
They incllude seaport (higher throughput on the recovery in global trade), airport (the eventual reopening of borders), consumer (cash handouts and recovery in the job market to sustain consumption) and REIT (reduced rental rebates, recovery in footfall and occupancy).
The research house also pointed out while the availability of effective vaccines has greatly brightened the recovery prospects of the air travel sector, it remains mindful of the need for airlines to recapitalise its balance sheet after months of massive losses during the pandemic.
“We acknowledge that our market has been flying under the radar of foreign investors due to Malaysia’s insignificant and shrinking weighting in MSCI Emerging Markets Index, the market’s inherently high valuations, coupled with the lack of tech start-up listing.
“We expect domestic liquidity (from both institutional and retail investors) to remain robust in 2021F and shall continue to neutralise foreign selling if any, as it did in 2020, ” said AmInvest Research.