• Stocks started off 4Q higher. Shares rose on hopes that the US government would pass additional measures to stimulate the economy, and optimism for coronavirus treatment. The KLCI rose to 1,530, almost 2% higher than its end-Sept closing level. Net foreign outflow trickled to only RM28m versus RM544m the previous week, amid a lacklustre retain participation. The main index however lagged the MSCI AC Asia Ex-Japan which rose nearly 5% since 30 Sept, as well as EM stocks in general.

• Large cap stocks recovered after a weak September. Large capitalisation stocks (banks, PChem, Dialog) recovered to help lift the KLCI last week. In September, banks had fallen close to their March lows as weakness due to myriad of factors including weak 2Q earnings, and poor outlook ahead as slow loan growth, reduced NIM become “longer in future” challenges. It is too early to say if banks have turned the corner, but the sector’s low average P/B ratio of 0.84x (Chart 3) – level seen during the GFC – seems to indicate a trough may have been reached, at least in the short-term.

• China watch – 3Q GDP release to show a broadening recovery. China's stock markets rose Friday after being closed from October 1-8 for the Golden Week holiday, ie the Shanghai Composite A-share Index rose 1.7%. In economic news, the Caixin China General Services PMI jumped to 54.8 in September 2020 from 54.0 a month earlier. This was the fifth straight month of growth in the sector, the latest evidence of China’s strong, post-COVID- 19 recovery. In the coming weeks, 3Q20 GDP (due for release on 19 Sept) and retail sales are expected to show a broadening of the recovery. China 2Q20 GDP grew by 3.2% yoy (-6.8% in 1Q20) beating consensus estimate.

• We are still in early-cycle economic recovery. Weaker earnings for 2Q20 had set the tone for the stock market in September. We estimate the KLCI aggregate earnings to see a significant fall of 16% this year, rising by 23% yoy in 2021 (Chart 1). We envision the sudden rise in local covid- 19 cases as a short-term risk. However, we remain optimistic of the global recovery currently taking shape. Overall, we favour sectors of early-cycle recovery, ie technology, selected industrials and selected consumer discretionary, as well as gloves. Our above-consensus KLCI target of 1,700 is retained. The biggest risk is on long-term policy commitments as domestic politics could be a distraction, which in turn could hinder portfolio inflow.

Source: BIMB Securities Research - 12 Oct 2020