• Malaysian stocks climbing wall of worry. Malaysia stocks finished off the week higher with the KLCI up by 0.7% and Emas closing slightly better. Month-to-date, the KLCI is at positive 3% and is currently almost unchanged from the end of 2020 level. Stocks had to manoeuvre issues ranging from higher-than-expected inflation prospects, a sharp decline in crude oil price, as well as weakness in bank stocks. Foreign funds turned net sellers but retail investors continued to marvel at the market’s prospect, resulting in a hefty RM522m net buying last week.
   
• Malaysian stocks resilient in the face of spike in bond yield. Since UST 10-yr yield broke the 1% level on 6 Jan, Malaysian stocks have stayed resilient as depicted by the Emas Index, which has risen by 4%. The rise in the FBM70 and FBM Small Caps index is even more staggering at 7% and 11% respectively during the period. We remain steadfast in our view that BNM will hold rates firm in 2021.

• Glove sector trashing may have seen bottom. We think the dark horse to take the leadership rein could be the glove sector. Plenty of negative news has battered the sector, ranging from oversupply to falling ASP to poor ESG, as analysts and investors turned their backs on stocks that reignited Malaysian market ravaged by the Covid-19 pandemic in 2020. As supernormal profits evaporate, glove stocks are priced at less than half their valuation pre-Covid and yielding well above their historical level. Unless analysts are dead wrong in their forecasts, we think glove stocks currently offer value from a contrarian perspective.

• Greater orientation towards technology sector. We believe technology is still a major beneficiary on the back of varying themes, most notably China exposure. Media has reported that China has been spending aggressively in semiconductor investment, to bolster the industry by on shoring chip manufacturing equal to those of the world’s top foundries. We view this positively as Malaysia’s tech companies have increasing exposure to China’s quest for microchip independence, including developing its own lithography system. Although this is still a long way to go (China is estimated to buy >70% of semiconductors from overseas vendors), China is the world’s largest semiconductor market and the technological revolution will continue to impact Malaysia tech companies. We continue to favour Inari and MPI in this space and retain our buy recommendation on both stocks.

Glove sector deserves some compassion at the moment

Since vaccine availability in November 2020, Malaysian glove companies have seen their share prices slumped by half on average. Despite record quarterly profits announced by Supermax (Jan 2021), Top Gloves (February 2021), Comfort (March 2021), and earnings upgrade by analysts, the market appeared perplexed on how to value glove stocks currently. Key risks such as vaccines and oversupply leading to lower ASP have been discussed but their negative impact on earnings beyond the supernormal profit of 2020-21 is still debatable.

We think glove sector deserves investors’ attention currently, from a contrarian approach, as:

1. Prices have dramatically fallen by more than half from their peak;

2. Earnings are projected to decline in FY22 but remain well above pre-Covid level;

3. Glove companies have been proactive in capital management – dishing out high dividends to shareholders the past few quarters;

4. ESG issues are real, but overplayed. Once rectified, investors will start to focus on positive aspect of ESG undertaken by glove companies; and

5. Several parts of Europe are back in lockdown, most notably France and Germany, on 3rd wave of infections as vaccine roll outs falter

Source: BIMB Securities Research - 22 Mar 2021