• Stocks entered 2H20 brightly. Malaysian stocks ended the week higher, as economic data turned market-positive in the later part of the week. The KLCI gained 4.3% from the previous week, while the HS Index was significantly higher at 6.4%. Index gains were driven primarily by glove stocks and cyclical groups, ie Pet Chem, Press Metal. Technically constructive, the KLCI has risen above its 200 days MA, while HS Index has formed V recovery. Regional stocks was also upbeat, seen by a 3.5% rise in MSCI AC Asia Ex-Japan.

• Data showing economic rebound. Economic data released last week appears to validate recent statements from key individuals (including ECB President Christine Lagarde and BOE Chief Economist) that the worst of economic coronavirus-driven slump is over. On Wednesday, the Caixin/Markit Man Index PMI rose to a 6-month high reading of 51.2 in June (vs May 50.7). Car sales in China surged 11% in June yoy for the third straight monthly gain. Thursday’s official payrolls report from the US Labor Department showed a record 4.8m gain in nonfarm payrolls in June. The unemployment rate also fell more than expected, from 13.3% to 11.1%. Malaysia June PMI rose to 51.0, the highest since Sept 2018.

• We reiterate our positive view: Equities in a typical recession recovery mode. A forward-looking stock market should begin to recover when the economy is worsening, followed by nascent turnaround. With this in mind and how history has shown, we remain optimistic on further gains as the Malaysian stock market is displaying recovery pattern as seen in mid-2009 when the KLCI rose powerfully from its March-2009 lows. Similarly, Malaysian stocks have seen a strong rally from the pandemic-driven bottom in March 2020 – with KLCI and Emas Index up an average 31%. Ringgit has remained stable at 4.27 versus USD and S&P GSCI Commodity Index has bounced 45% from the year’s low.

• Earnings projected to recover in 2021. A key reason the stock market rallying sharply since 1Q20 is due to anticipation of both earnings and economic recoveries next year. Our earnings forecast for the KLCI and HS remains at 16% and 12% yoy for 2021. We continue to like the following stocks/sectors/groups, ie healthcare, technology and economic sensitive sectors: Supermax (TP RM11.00), Top Glove (RM20.50), MYEG (RM1.70), GHL (RM2.15), MPI (RM12.75), Lotte Chem (RM2.20), and Pet Chem (RM6.70).

Source: BIMB Securities Research - 6 Jul 2020