CONCERN over the country’s political stability and the unabated Covid-19 cases have dampened investor sentiment towards Malaysia’s equity market.
As it stands, Malaysia’s stock market is one of the worst-performing bourses in Asia on a year-to-date (ytd) basis. Since the start of the year, the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) have shed about 7% as of Thursday.
Yesterday, the FBM KLCI extended its losses, falling 18.33 points, or 1.21%, to close at 1,494.6 points, down 8.15% ytd.
Amid the downside risks, some fund managers have turned more cautious when it comes to equity investment.
For Eastspring Investments Bhd chief investment officer Doreen Choo, for instance, while she sees the current market weakness as an opportunity to accumulate fundamentally sound stocks, the conviction now is to stay defensive.
“Our near-term positioning in equities is defensive, given the prolonged lockdown and political uncertainties. However, we continue to like the financial and technology sectors, as well as selective high yield names,” Choo says.
“We are selective on re-opening plays; the theme is still valid but recovery may be delayed to the fourth quarter of 2021 into 2022,” she tells StarBizWeek.
UOB Asset Management chief executive officer Lim Suet Ling, on the other hand, takes on a “balanced approach”.
“For equities, we are adopting a balanced approach by looking at the value/reopening and growth sectors,” Lim says.
“Within the value/reopening sectors, we see opportunities in consumer and financial names. Meanwhile, we view the technology sector as offering an attractive secular growth story,” she shares with StarBizWeek.
“The Malaysian technology sector has little representation in the Malaysian equity indices, but the current industry ecosystem that has been set up and nurtured over the years is commendable.
“The ongoing theme of supply chain relocation has also been an impetus to Malaysia’s drive to attract technology-related investments,” she explains. Mixed fortunes
Globally, equity markets have generally performed well during the first half of this year, led by developed markets. The United States and European markets, for instance, registered double-digit returns, underpinned by strong earnings momentum, policy stimulus, and anticipation of reopening with the rollout of the Covid-19 vaccination.
It was not all smooth sailing as the stock market performance was affected by rising inflation expectations in the second quarter of 2021, says Lim, noting that the rise in inflation expectations caused an increase in the yield of 10-year US Treasury Bills and some volatility in equity markets.
Conversely, the Malaysian domestic stock market underperformed, with the FBM KLCI posting a 5.8% decline in the six months of 2021.
“The key reasons for the underperformance were attributed to the uneven recovery with movement controls to mitigate Covid-19 and the general decline in glove stocks, unlike in 2020, when glove manufacturers were a key contributor to the positive index performance,” Lim explains.
For the remaining part of the year, Lim expects global equities to remain supported by the same factors that underpinned the market in the first half of 2021, namely, earnings momentum, policy stimulus, and reopening prospects with vaccination.
“The earnings growth forecast for global equities in 2021 is in excess of 30%. Historical experience suggests that the returns from global market have been positive when earnings growth are more than 25%,” she says.
On inflationary concern, she adds, historical evidence suggests the US equity market could absorb an inflation rate of up to 4%.
As for the prospects of the local bourse, Lim says, prospects for the remaining part of 2021 would be underpinned by the reopening of the economy.
“Vaccination rates are accelerating and this would pave the way for the country to achieve herd immunity and ultimately, normalcy in economic activity,” she says.
“With the reopening, we see potential for the market to be re-rated. The re-rating potential would have been higher if not for political uncertainty,” she adds.
Buy on weakness
Choo reckons while recent political developments in Malaysia have weighed on sentiment, the current weakness of the local bourse could be opportune time to buy good stocks.“We are cautious on the market given the new political developments in the midst of rising Covid-19 cases. However, this could present an opportunity to accumulate fundamentally sound stocks on weakness,” she says.
She notes although the local equity market kicked off the year with economic re-opening optimism, investor sentiment was quickly dampened by increasing Covid-19 cases, which resulted in varying degrees of movement restrictions, and ultimately culminated in the nationwide lockdown on June 1.
While the full lockdown has not been as restrictive as the first movement control order (MCO 1) in March 2020, consensus expectations for 2021 gross-domestic-product (GDP) growth had declined to an average of between 4% and 5%, versus the official estimates of 6% and 7.5%,” Choo says. “The longer-term impact from extended lockdowns will likely include continued displacement of people and above-trend unemployment rates,” she adds.
On a positive note, however, the increasing inoculation rate is giving hope, she says.
“Events that remain on our radar would include the delivery of vaccines and the vaccination progress in Malaysia,” Choo notes.
“Once the health crisis is properly managed, the economy can re-open and be slowly nursed back to health,” she adds.
At the same time, investors are also mindful of the fluidity of the current heightened political risk in Malaysia brought about by UMNO’s recent decision early this month to withdraw its support for Prime Minister Tan Sri Muhyiddin Yassin.
The Yang di-Pertuan Agong’s recent rebuke over the Cabinet’s decision to revoke the Emergency Ordinances promulgated during the state of emergency without his consent had only exacerbated the political pressure on the current administration, intensifying calls for Muhyiddin to resign from the prime ministerial office.
“Any political noise which distracts from the proper management of the health crisis at hand will be frowned upon by investors. This may also increase downside risk to Malaysia’s sovereign ratings and encourage more foreign outflows,” Choo says.
“Externally, we believe investors will be watchful of the inflation situation in the United States and also the possibility of a faster-than-expected tapering and rate hike in 2022,” she adds.
UOB’s Lim notes the global capital markets have been supported by the unprecedented fiscal and monetary stimulus amid the fallout of Covid-19 pandemic.
“As economies return to normalcy post Covid-19, investors would expect governments and central banks to begin to gradually reduce these stimulus measures. This could cause some volatility to markets if not managed properly,” she says.
According to Lim, global markets have thus rallied on the back of a healthy backdrop that is a fairly “goldilocks” environment that is neither too hot nor too cold.
“The risks to markets are that this balance changes and growth disappoints or the economy becomes overheated. Increasingly markets have been focusing on the risks of global growth becoming ‘too hot’ and the associated rising inflationary pressure,” she explains.
Domestically, Bank Negara has guided that the elevated inflation in Malaysia is transitory due to year-on-year low base effects and that inflationary pressure should normalise in the second half of 2021.
“Real interest rates have been in negative territory in recent months and this may have spurred more risk-taking activities as investors seek positive returns on cash, further supporting above trend retail participation in the stock market,” Choo says.