Trading themes for 2022

According to CGS-CIMB, Bank Negara is expected to dial back some monetary support, with a 50-basis-point hike in the OPR from the current 1.75% to 2.25% by end-2022 as economic activity returns to normal and Covid-19 becomes less of a threat to the economy.

PETALING JAYA: After a turbulent 2021, the local equity market will likely face an even more challenging environment in 2022 due to a confluence of factors in the form of policy, corporate earnings and political risks.

While downside risks for the benchmark FBM KLCI will likely be contained, investors are advised to be nimble in their investment strategy, as the stock market is expected to remain volatile in 2022, said CGS-CIMB Research.

According to the brokerage, there are six investment trading themes that could help investors maximise potential returns in a challenging environment next year.

These six trading themes are beneficiaries of the overnight policy rate (OPR) hike; value and laggard plays; recovery plays; electric vehicle (EV) plays; environment, social and governance (ESG) picks; and high dividend-yielding stocks.

According to CGS-CIMB, Bank Negara is expected to dial back some monetary support, with a 50-basis-point hike in the OPR from the current 1.75% to 2.25% by end-2022 as economic activity returns to normal and Covid-19 becomes less of a threat to the economy.

“A rate hike is positive for banks, as the size of floating-rate loans is larger than total fixed deposits for banks,” it explained, noting both would be repriced upward in tandem with the OPR hike.

CGS-CIMB's overall top-three stock picks are Inari Amertron Bhd, HLB and QL Resources Bhd

In its report yesterday, CGS-CIMB said it had an “overweight” call on banks, with Hong Leong Bank Bhd (HLB), Public Bank Bhd and RHB Bank Bhd as its top-three picks in the banking sector.

“Other potential beneficiaries of a rate hike would be companies that have a large net cash position, as they will gain from higher interest income,” it said.

Conversely, a rate hike is negative for companies with high ringgit borrowings, as it would result in higher interest expenses, the brokerage added.

On value and laggard plays, CGS-CIMB said these would comprise stocks that are currently trading below their share price highs in the pre-pandemic year of 2019, have underperformed the FBM KLCI year-to-date in 2021, and are now valued at an attractive price-to-book value (P/BV) compared to their pre-pandemic average P/BV.

“We believe these stocks, which were impacted by Covid-19, could move closer to their pre-Covid-19 share price levels as the economy recovers which should lead to a recovery in earnings,” it explained.

On recovery plays, the brokerage said it would be stocks that are expected to show strong earnings growth in 2022 when compared to the net profit forecasts for 2019.

As for EV plays, CGS-CIMB said it expected the Malaysian semiconductor service and test equipment providers to benefit from increased semiconductor content value going into automotive on the back of accelerating EV penetration.

“We believe this provides long-term demand visibility for the automotive semiconductor market,” it said.

It identified Malaysia Pacific Industries Bhd, Genetec Technology Bhd and Pentamaster Corp Bhd as key beneficiaries of the growing electronics content adoption in EVs.

In the ESG space, CGS-CIMB favoured stocks with the highest scores by third-party assessors, namely, the FTSE ESG Grading Band, Refinitiv ESG score, Sustainalytics ESG ratings and MSCI’s ESG rating.

Meanwhile, CGS-CIMB pointed out that high dividend yields could cap the downside risk for share prices.

“Investors continue to seek high dividend-yielding stocks in view of the low interest rate environment in Malaysia. Moreover, stocks with high dividend yields could offer shelter in these uncertain times,” it said.

It favoured stocks with dividend yields of 5% and above for 2022.

Overall, CGS-CIMB pegged its end-2022 FBM KLCI at 1,612, a downward revision from its earlier projection of 1,637 to reflect changes in benchmark constituents and its recent downgrade of Top Glove Corp Bhd’s earnings.

It expects the FBM KLCI to close at 1,495 at end-2021.

“We expect investors to tread cautiously into 2022, as we see potential headwinds buffeting the markets in the form of new Covid-19 waves (Omicron), return of intra-day short-selling, foreign fund outflows due to the US Federal Reserve taper, reversals of fiscal stimulus, tighter monetary policy, higher transaction costs for trading of Malaysian shares, corporate earnings risks due to higher taxes and political risks,” CGS-CIMB said.

Its preferred sectors are banks, technology, gaming, petrochemical, media, oil and gas, healthcare, brewers, utilities, packaging, healthcare and electronics manufacturing service.

Its overall top-three stock picks are Inari Amertron Bhd, HLB and QL Resources Bhd.