• Stocks higher on vaccine “game changer”. News that pharmaceutical company Pfizer has developed a coronavirus vaccine sent global shares higher. Investors rushed to reposition their portfolios, also back into EM. Key local indices are now back into positive YTD (Table 1), as the KLCI rose almost 5% for the week and climbed to the highest level since August. The KLCI has closed its performance gap with Asian stocks on a one-month basis, although local stocks suffered a net foreign outflow of RM246m versus week 45 net positive of RM115m.

• Easy money and vaccine – powerful combination. On the back of the vaccine news, investors are now returning into EM stocks and into sectors that were hit the hardest by Covid-19, such as airlines, oil, and hospitality. We think this is an opportunity to add risk, especially now that stocks such as plantation are still off their recent July highs and some technology stocks have dipped last week due to so called “rotational” plays. However, we remain wary of badly hit sectors such as airline, whether the damage done could be repaired over the next 1-2 years.

• Rise in yields pointing to further recovery. Since the pandemic broke out, we hear concerns that rising stock markets appear disconnected from reality. One argument in support of this view is that longer term bond yields have stayed depressed, which means the economic recovery from the bond market’s perspective is feeble. Nevertheless, Malaysia’s 10-year MGS yield has creeped up to 2.7% from its August level of 2.3%. Meanwhile, the 10-year US Treasury has risen from 0.5% to 0.9% during the same period. Another change in signal was performance of cyclical stocks, ie industrials and basic materials, which have done relatively well since 3Q20 as demand improved and commodity prices rose.

• Our themes remain largely intact. For the past 6 months we have been calling for buying into cyclical stocks, ie industrial and basic materials. Our bullish stance taken for 2H20 and into early 2021 was based on V-shaped recovery – inducing investors to eventually gravitate into economic sensitive sectors – and have called for above-consensus KLCI target of 1,700. Recapping our 2 main themes are early-cycle recovery and digital technology. Risk-on positions would be positive for industrials, basic materials and consumer discretionary sectors, in our view. We believe technology is still a major beneficiary on the back of varying themes, driving semiconductor growth

Source: BIMB Securities Research - 16 Nov 2020