THE fresh wave of Covid-19 cases may have sent the financial markets reeling under panic over the week, but analysts say investors should look past the current short-term volatility and seize the opportunity to go long on recovery plays.
This is because economic and earnings growth prospects have improved significantly as vaccination campaigns accelerate globally.
Amundi Asset Management, for one, continues to advocate a risk-on stance and a preference for equities over credit.
The fund manager argues risk assets continue to be favoured in a cyclical recovery and due to still-accommodative central banks in developed markets. This bodes well for equities, with a focus on those that are most cyclical and regions (Europe) where the reopening of economies will drive further acceleration that is not yet priced in, it says.
“We believe investors should stay constructive on equities but rotate across regions, with a preference for developed markets. We confirm our positive stance on Japan as a pro-cyclical market, ” Amundi head of multi-asset Matteo Germano says.
“European equities could now benefit from the new recovery wave, an acceleration in vaccinations, favourable relative valuations, strong earnings growth and strong technical, ” he points out.
The group recommends some exposure to emerging market (EM) equity but with a lower conviction now, as recent volatility and US dollar strength are short-term headwinds. Within EM equities, Asia remains the key area to play cyclicality, it adds.
“EM companies should benefit from the global/EM growth rebound, a revitalisation in earnings and increasing flows. However, we continue to monitor risks linked to the speed of US rate increases, disappointment on vaccination rollout in emerging countries and possible geopolitical tensions, ” Amundi equities team, led by Kasper Elmgreen, says.
“We maintain our tendency to increase value/cyclicals over growth, ” they say.
Amundi says confidence regarding the economic recovery is the main driver of equity markets, pricing in strong earnings growth amid loose financial conditions and an only temporary inflation pick-up.
“The reflation trade will continue to support exposure into cyclical markets, small cap and value stocks, now sustained by a strong earnings cycle rebound. We also expect the dividend theme to be back in focus, ” Elmgreen says.
“Overall, beyond 2021, earnings growth is likely to continue at a double-digit pace for the next two years. However, earnings recovery is now a consensual view and this in itself is a major risk, along with a sustained pick-up in bond yields, ” he adds.
As a result, investors should stay active and focus on fundamental analysis, he stresses.
Echoing the same optimism on equities, TA Research says the ongoing vaccination programmes should contain the Covid-19 pandemic and complement the huge stimulus measures globally to steer back the economy on a steady growth path in the coming years.
The local brokerage notes that while many developing countries, including Malaysia, are still lagging, the vaccination momentum is expected to pick-up towards the fourth quarter of this year, supported by increased awareness about the benefits of vaccination and more people becoming convinced by the good progress achieved by nations that have attained herd immunity via widespread vaccinations.
TA Research says investors should not be distracted by the current market volatility. Instead, it says, they should be looking for valuable exposure in the recovery sectors as the economy rebounds.
The brokerage predicts a V-shaped economic recovery for Malaysia in 2021.
It forecasts a 6.4% growth of gross domestic product (GDP) for Malaysia this year. The country’s GDP contracted 5.6% last year.
In the Malaysian equity market, TA Research says the potential recovery plays are in the banking, building materials, consumer, oil and gas, plantation, property, and tourism-related sectors.
On banking, TA Research’s optimistic take is based on improving consumer and business confidence. It adds that financial institutions in the country are backed by strong capital and liquidity buffers, along with benign asset quality.
As for building material, the brokerage says it expects steel price in the second half of 2021 to be well supported by healthy demand. It also expects consumer companies to deliver stronger set of results, driven by recovery in consumer spending coupled with the low base effect.
On oil and gas, TA Research points out that economic recovery will rejuvenate demand for crude oil and derivatives such as fuels and petrochemicals. Hence, production will ramp up, and lead to resumption of oil and gas capital expenditure spend.
Correspondingly, demand will surge for tanker shipping, as well as offshore fleet and services. Thus, this would catalyse a rebound in charter rates, fleet utilisation and contract awards, it says.
Meanwhile, TA Research expects higher crude palm oil (CPO) and fresh fruit bunch production to drive earnings for plantation companies.
“We believe that weaker-than-expected low palm oil stockpiles, relatively tight global edible oil supplies and the rise in crude oil prices, which bode well for biodiesel, will be the main key drivers for high CPO prices in the next one to two years, ” it says.
TA Research expects property earnings to be underpinned by the country’s economic recovery, low interest rate environment, and supportive government measures.
“We believe housing market recovery is imminent and expect developers to record an encouraging sales growth of 16% and 10% in 2021 and 2022, respectively, ” it says.
As for tourism-related counters, TA Research says the price recovery is not over yet, and there could be a second leg rally in the fourth quarter of this year to the first quarter of 2022, when Malaysia achieves herd immunity and borders reopen for mass travelling.