PETALING JAYA: While investor sentiment is expected to improve as vaccination rates increase, short-term risks, including the evolving pandemic environment and potential financial shocks from tighter liquidity, may keep the local bourse in a prolonged consolidation phase.
Although the FBM KLCI closed 2.07 points higher yesterday at 1,514.60 amid talk of economic reopening, year-to-date, the index has declined some 6.9%. Daily new Covid-19 cases remain close to record highs, weighing on consumer sentiment.
Notably, more speed bumps are emerging and underlying political risks point to a possibility of continued volatility in the market. Additionally, a “recovery scenario” may have already been priced in, said RHB Research.
As such, the research house has lowered its end-2021 FBM KLCI target to 1,650 points from 1,750 points previously, based on an unchanged target price earnings ratio of 16 times with a seven-year mean. Nonetheless, economists and analysts maintained that the recovery story for Malaysia remains intact with the ramp up in vaccination.
The path towards recovery lies in a quick and efficient immunisation programme, as the government strikes a cautious balance between a lockdown and re-opening.
Many developed countries that have managed to secure ample vaccine supplies have been able to supercharge their immunisation programmes, bringing forward herd immunity objectives and allowing for a return to normalcy. This has led to the recovery of their economies and improvement in corporate earnings.
“In the past week, daily vaccinations have consistently remained well above the 400,000 mark, or more than 1% of the total population. At the time of writing, approximately 14% of the total population had been fully vaccinated. Assuming no further vaccine supply constraints, we expect to reach 40% of the total population threshold by late August and 80% by end-2021,” said RHB in a report yesterday.
While a successful vaccination programme is key, the next growth cycle is still in the early stage. Recovery from the pandemic remains extremely uneven.
According to Moody’s Analytics, the onus is on fiscal policy to do the heavy lifting to continue supporting growth. “Malaysia, for example, has introduced four significant fiscal stimulus packages this year and may increase its debt ceiling further as severe movement restrictions in Kuala Lumpur bite.”
It also expects further markdowns in gross domestic product forecast for the current quarter, given that the economic recovery is being paused and a stronger bounce back is pencilled in for the December quarter.
Significant pent-up demand should boost the economy later in the year as recovery gathers pace and tourism picks up when borders reopen.
Meanwhile, the outlook for corporate earnings remains positive as the broader economy starts to reopen, said RHB. It anticipates a robust rebound in corporate profitability in 2021 and 2022.
That said, the short-term outlook for equities is expected to remain volatile.
In which case, defensive plays and growth stocks may suit investors’ current palate.
“The prospects of a tighter liquidity environment and underlying political risks will compel continued exposure to defensive names and higher cash holdings. Nibbling the dip for cyclical and value stocks on market weakness to position for a recovery scenario remains an enduring theme,” it said.
Among its top picks in defensive counters are Tenaga Nasional Bhd, IHH Healthcare Bhd, Magnum Bhd, Axis Real Estate Investment Trust, Allianz Malaysia Bhd, RCE Capital Bhd and Freight Management Holdings Bhd.
If the pace of vaccination picks up and the country is able to swiftly move into subsequent phases of the National Recovery Plan to allow the economy to re-open safely, investor sentiment should pivot to the positive.
“This is still very much a realistic expectation, and a recovery scenario is still on the cards. Investors should look to increase exposure to cyclical and value stocks, and buy on weakness. These are companies that are leveraged on an improving economy and better business conditions and the new growth cycle,” added RHB.
Its top recovery stocks include CIMB Group Holdings Bhd, Genting, Hong Leong Bank Bhd, IOI Properties Group Bhd and MISC Bhd.
Local exporters are also expected to benefit from the early reopening of developed economies and strong US dollar. Malaysia’s exports grew 47.3% year-on-year in May, driven by the electrical and electronics sector and higher palm oil and crude oil prices.
RHB noted that strong retail interest will continue to lend support to the market. With a robust retail participation rate of around 39%, this segment of investors will more than offset the foreign net outflow.
“While we recognise that upside could be capped in the short term, due to the protracted pandemic situation and extension of the lockdown measures – on top of the domestic political situation – bottom-fishing activities would resurface at various support levels.
“This would be due to the low interest rate environment and improved investment efficacy among retailers,” it said.