EXACTLY a year ago, the euphoria in the stock market saw investors pricing in what they believe to be the start of an economic recovery in the second half of 2021.
As forward looking as the market is and despite the vaccine optimism that lifted markets in November 2020, the state of the global economy is nowhere near the recovery envisioned last year.
The vicious twin of the Covid-19 in the form of the Delta variant took over the dirty work of wrecking the economy, which has recently forced the United Kingdom and Sydney into renewed lockdowns.
Even Israel, being the most vaccinated country in the world, reimposed its mask mandate indoors due to fears over the infectious variant.
A year ago today, there were only five new Covid-19 cases as Malaysia headed into its first month of the recovery movement control order.
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And yet yesterday, the total number of new cases almost touched the 7, 000 mark with 6.982 cases, despite being in a state of lockdown for more than a month.
These uncertainties have brought the bears back into the market, forcing investors to adopt a wait and see approach in search of positive catalysts.
Malaysia’s benchmark index, the FBM KLCI, has been on a downward trend in recent months and continued to shed 0.88 points yesterday to close at 1, 533.35 points.
Year-to-date (y-t-d), the index has dropped 5.73%, making it one of the worst performing indexes in the region and globally.
And as much as liquidity is still out there in the market, the volume at which it is pouring into equities is not as vibrant as what was seen last year.
Instead, investors are putting their money into safer investments, including a frenzy in applications for initial public offerings (IPOs) which was highlighted by StarBizWeek last Saturday.
The theme of uncertainty has taken centre stage and investors are taking a step back as they await opportunities for recovery plays.The extended restrictions under the four phase National Recovery Plan is expected to take a toll on the economy, which led to the rollout of the National People’s Well-Being and Economic Recovery Package or Pemulih package.
Shifting trend: A file picture showing a person looking at stock prices displayed at a trading gallery in Kuala Lumpur. Investors are seen to be putting their money into safer investments including IPOs. — Bloomberg
This includes another six-month moratorium for affected borrowers and i-Citra, a withdrawal facility for members of the Employees Provident Fund (EPF).
The former is estimated to bring a relief of up to RM80bil while the latter is expected to channel RM30bil into the economy.
There are differing views as to whether this would lead to a renewed interest among retail investors into Bursa Malaysia.
UOB Kay Hian head of research Vincent Khoo believes that the latest schemes would not fuel liquidity in equities like last year.
“Businesses have been suffering for over a year and in general, people have to be more cautious on spending.
“Fundamentally, there is also an absence of a mega phenomenon like rubber glove stocks in 2020
“Investment sentiment in Malaysia has also been dampened by corporate governance issues or forced labour complaints by an activist which significantly affected some stocks, ” he tells StarBizWeek.
MIDF head of research Imran Yassin Md Yusof does not discount the possibility of retailers using the excess cash to invest in the stock market.
He notes that even without the latest loan moratorium and i-Citra withdrawals, MIDF has observed that retail investors have been supporting the market this year and have remained the only cumulative net buyers in the market on a y-t-d basis, amounting to RM8.1bil.
For the first quarter of 2021, Imran says the average daily value from retail investors was RM2bil, higher than that of RM1.6bil for the whole of 2020.
Bank Islam chief economist Mohd Afzanizam Abdul Rashid (pic below) concurs that the two measures could channel liquidity into the stock market.
“Those who are financially savvy or those who may have higher risk tolerance would want to venture into stock markets in search for better returns.
“So this could translate into active participation from retail investors, ” he says.
Mohd Afzanizam Abdul Rashid
Recovery play and strategy
An increase in volatility is expected, according to Imran but he believes that the underlying macroeconomic trajectory is on a recovery path.
“This would mean that the recovery play is still on the cards.
“As per our second half outlook, we maintain our top picks as we believe that these companies will benefit from a recovery in the economy especially as the economy reopens fully.
“We opine that investors should continue to look for companies with solid fundamentals, ” he says.
MIDF Research is positive on automotive, banking, construction, consumer (F&B and retail), healthcare, industrial products and services, oil and gas, plantation and technology.
Vision Group managing director Chua Zhu Lian says the market has faced declines since last year so it will be normal that this has turned a segment of investors, especially new investors who were previously on a winning streak, into a much more conservative approach towards investing.
“On the other hand, savvy investors will certainly weigh their options with foreign stocks and economies like China which is recovering much quicker from Covid-19, will definitely compete for investor’s interest.
“Most investors will be better off if they stick to the golden rules of successful investment, focusing on strong company fundamentals and adopting a long-term investment approach.
“My advice to investors is to have a realistic mindset on investment returns and avoid chasing the hot stocks and succumb to the consequences of greed, ” said Chua, who is also the investment director of Fortress Capital Asset Management.
Khoo advises investors to be defensive and gradually raise their exposures to reopening plays by the end of the third quarter, in aligning the investment strategy with the country’s goal of achieving herd immunity by October.
CGS-CIMB head of research Ivy Ng (file pic below) says the concern over the high number of Covid-19 cases and the prolonged restrictions may have caused investors to feel jittery.
Ivy Ng
She foresees short term weakness due to the restrictions and the recently announced enhanced MCO in the Klang Valley, coupled with political uncertainties.
“But if we hit our vaccination target for key states, the recovery should be back in play in the fourth quarter, ” she says.
The research house’s key recovery picks are Malayan Banking Bhd, Genting Bhd and Malaysia Airports Holdings Bhd.
Juwai IQI global chief economist Shan Saeed says the global economy will only recover in 2023 as there are still a lot of fragilities in the system.
“The main challenge is that there are a lot of uncertainties and investors don’t like uncertainties.
“In Asean, people have money but they are very cautious. There is liquidity in the system but people are not moving back to the stock markets because everyone is having a wait-and-see approach, ” he says.
Impending correction?
Amid the rise in Covid-19 cases globally, expectations of monetary policy tightening by central banks and the high valuations of equities on Wall Street, there have been an increasing number of predictions for a correction in the market while the slightly more pessimistic are more inclined towards a crash.
Looking at the Dow Jones Industrial Average (DJIA), it’s price-to-earnings (PE) ratio now stands at 29.29 times as compared with 21.95 times a year ago, something that has outpaced its fundamentals, as argued by market observers.
Imran says a correction is expected in the US markets given its lofty valuations.
“We believe that volatility will increase as the Federal Reserve may start to react to the issue of inflation.
“This will have an influence on the Malaysian markets and likewise we expect to see increased volatility. However, the impact could be moderate as our market is already trading at a discount to its 10-year mean PE ratio.
“Hence, we expect that the magnitude of the correction in the Malaysian market may be lesser when compared with the US market, ” he says.
Chua says quantitative easing happening simultaneously in many nations is one of the main factors causing the higher valuations at Wall Street.
”I think sentiment in the Malaysian market are still correlated to what happens there so investors in the Malaysian market will still need to pay attention to Wall Street.
“In usual circumstances, a crash is unlikely given an environment with ample liquidity.
“However, it is always difficult to make predictions on market cycles and prefer not to make investment decisions based on market timing, ” he says.
While markets in the region usually track Wall Street movements, Ng however, has a contrarian view, saying that the performance of the US markets have decoupled from Malaysia based on the latest week’s performance.
She says this could be due to the US doing better in its management of the pandemic and because of the election of a new President in November.
Inflationary fears
The consumer price index (CPI) in the United States surged to 5% in May, its highest since 2008, sparking fears of a sustained inflation although the Fed has reiterated that the inflation is transitory.
Mohamed El-Erian, the president of Queens’ College of Cambridge University and the chief economic adviser of Allianz told an interview with CNBC recently that the Fed may be falling behind on inflation and that it may have to “play catch up”, risking another recession for the United States.
He said if one were to look at the figures on inflation, there would be serious doubts as to how transitory the inflation is.
“But as long as the Fed believes it’s transitory, that is what matters for markets, ” he told the business channel.
Shan says the Fed is panicking and does not fathom the ground realities of serious price inflation, causing markets to be in turmoil and investors are nervous.
He adds that the challenge is the danger of inflation resurgence getting deep into the market and which asset class takes the hit first if interest rates were to rise abruptly. “Rising interest rates can impact two asset classes fiercely and emerging markets badly.
“I can foresee four key risk variables hitting the market in the next 12 to 17 months, ” he says.
These are systematic risk in the form of inflation or interest rates hike, sovereign debt risk, liquidity risk once the quantitative easing is over or stopped and a fair valuation risk when there is a correction in equity markets and revolution of other asset classes.
“We have seen what happened last week, when the Fed injected funds in the repo market. The Fed’s reverse repos have spiked to US$1 trillion (RM4.2 trillion).
“The cash drain undoes eight months of quantitative easing. This is sending a clear signal to the market that something is wrong somewhere. Banks are having problems and banks are holding on to liquidity, ” he says.
Shan adds that the US economy is heading for a 1970s style stagflation, a situation of high inflation, low growth and high unemployment.“Market pundits and gurus are making colossal claims that economic recovery which in my opinion, is a mirage while data are mostly statistical illusion.
“The challenge is the danger of inflation resurgence getting deep into the market, ” says Shan.
Afzanizam says economic data points in the United States have been quite decent, seeing how the unemployment rate has come down from 14.8% in May last year 5.8% in May 2021 while home prices have risen at clip, indicated by the 14.6% gain in the S&P Case Shiller index for the month of April.
“In that sense, there is a case for the Fed to unwind its monetary policy accommodation but it will do it gradually and more importantly, it will guide the markets as to when they want to dial down the asset purchases programme.
“Again, markets can be very volatile during this period, ” he says.