Fundamentals for Malaysia equities still solid; KLCI to hit 1,830: Maybank KE
Singapore
DESPITE a second round of movement control order (MCO) restrictions across most of Malaysia in a bid to curb the increase in coronavirus cases - the so-called MCO 2.0 - Maybank Kim Eng analysts say the underlying fundamentals for the country's equity market remain intact.
Maybank Kim Eng's regional head of equity research Anand Pathmakanthan said that although Malaysian equities have fallen increasingly out of favour with foreign investors, the market "can still move higher" as it is supported by domestic institutional and retail interest.
Maybank KE is predicting that government bond yields will trend upwards, reversing a downward trend over the past few years, which they said would make equities more attractive. A weaker US dollar is also favourable for emerging markets such as Malaysia. In addition, prices for both hard and soft commodities have been generally recovering across the board. This augurs well for Malaysia's economy, which is relatively resource-dependent.
Maybank KE has a 2021 target of 1,830 points for the benchmark Kuala Lumpur Composite Index (KLCI). It closed at 1,601.54 on Wednesday. While the target may seem "a bit aggressive" given the index's weak showing at the beginning of the year, Mr Pathmakanthan said that if the bank's earnings expectations are accurate, then the index would have a forward earnings multiple of 16 times at that level - in line with its historical trading range.
With the MCO back in place, investors are likely to be concerned about the blow to the Malaysian economy as several sectors cease operations. But Maybank Kim Eng's chief economist Suhaimi Ilias estimates that some 78 per cent of the Malaysian economy will remain operational in MCO 2.0, compared to just 40 to 45 per cent in the second half of March and 52 per cent in April last year.
Malaysia's daily economic losses are therefore estimated between RM0.7 billion (S$229 million) and RM1 billion, less than the estimated RM1 billion to RM1.5 billion during the first MCO.
To ride out the pandemic, Maybank KE is advising clients to have a balance of value and growth stocks, as well as some yield, in their portfolios. Mr Pathmakanthan said some counters, such as glove stocks, should offer both good earnings growth and good dividend yields this year.
"Glove stocks have been underperforming since November, when the vaccine newsflow hit the market," he said. "It will take quite some time before herd immunity is reached, and vaccines don't stop people from getting Covid-19. In that scenario, we don't expect glove demand to fall off dramatically, if at all."
He acknowledged, however, that glove stocks could see some pressure on the supply end. As glove makers in Malaysia and other countries such as China ramp up production, there could be pressure on average selling prices.
Hartalega remains the brokerage's top pick, as the company has taken care to maintain better environmental, social and governance credentials compared to its competitor Top Glove. The latter has been thrust into the spotlight on multiple occasions for labour issues.
Mr Pathmakanthan also said investors should hold onto tech stocks, but recommends cheaper options such as Inari and Globetronics. Pricey tech counter ViTrox Corp is on the brokerage's sell list.
According to him, certain tech companies Maybank KE spoke to have seen United States-based customers move orders to Asean instead of China in a bid to relocate supply chains. He added that the ongoing US-China trade tensions have exacerbated this shift, and tech counters will continue to be beneficiaries.
