FBM-KLCI appears to be in wait-and-see mode, inching between gains and losses as stocks have recovered about half of what they lost due to the coronavirus shutdown. If US Fed Chairman Jerome Powell is right, then the path ahead is both highly uncertain and subject to significant downside risks. Covid-19 proved to be as lethal as feared and its principal victims are, we now know, no longer confined to small sub-group of populations. New global cases are not dropping. The World Health Organization said the new coronavirus could become an endemic disease that “may never go away.” Economy-wide shutdowns are necessary and extraordinarily expensive. The reality on the ground is forcing the hand of our leaders. If there is really any real signs of bottoming, I would expect to see copper prices moving higher as global economies strengthen, gold prices declining due to decline in risk aversion, and 10-year UST moving higher given the improving confidence in the long-term outlook for the US economy. Let the fact speak for itself!

Has market looks across the valley of despair? I am quite pessimistic that a recovery is underway and there are sure to be significant market setbacks and more "walls of worry" to climb before this is all over. Inflation expectations are low when consumer is petrified of going to shopping malls and amount of people out of work is rising. Oil prices while showing sign of stability, are unlikely to be inspiring. In this greatest historic disconnect between stock markets and economic, something must give ways eventually.

FBM-KLCI trades at 16.3x PE - within 1-standard deviation band of 5-year PE average of 17.8x. Implicitly, markets assume that core FBM-KLCI components – banking and telecommunication stocks theoretically trade at pre-crisis level, possibly Maybank at around RM9.00, Public Bank in excess of RM20.00, Axiata and Digi.com above RM4.90 level. It remains a good possibility if either/or corporate earnings could surprise on the upside supported by strong fiscal spending and political stability, easing US/CH tension, sustainable rebound in oil prices and return of capital inflow cycle to emerging markets (EMs) including Malaysia. Based on the iShares MSCI Emerging Markets ETF, Malaysia’s weighting in this benchmark emerging market equity fund currently stands at 2.1%. Traditionally, Malaysia is seen as a defensive low-beta EM component within the EM indices. More so, our markets trade at a premium against both developed and emerging markets.

Corporate earnings could see significant downward pressure along with challenging forward dividend outlook. My sense is that we are going to see the 7th year where FBM-KLCI’s dividend yield is below the 10-year MGS yield. This year could also see more disposals by GLCs notably Khazanah, EPF, KWAP and Petronas to further support fiscal requirements. I do not wish to over-play the current challenges facing the economy but as companies cope with the disruptions, the damage will be substantial.

A simple simulation based on reduced EPS expectations, it suggests that 1,314 to be a solid fundamental support based on market PE ratio of 15.6x, a level last seen in the 2008/09 Global Financial Crisis. Worsening sentiment, however, may take the FBM-KLCI down to 1,090 based on technical 76.4% Fibonacci retracement support level but this is not our base case  assumption.

Chee Seng, Wong
CIO, Athena Advisors
wong-chee-seng@outlook.com