• Performance in 1Q21 not entirely unexpected. We had predicted that Malaysian stocks performance would remain constructive in 2021. So far in 1Q21 some of the predictions had materialised as the economic recovery gained momentum around the globe and vaccine development saw material progress. Although the KLCI is almost unchanged this year, the index fell in Jan and Feb as bond yield rose and only began to recover in March. Most notably the KLCI saw a 7% decline between mid-Dec 20 and end-Feb 21. Foreign funds continued to be net sellers albeit a slower RM1.5bn in 1Q21 vs negative RM2.3bn in 4Q20, while retail investors continued their net buying of RM4.9bn vs RM2.6bn during the same period.

• No surprise – Reflation and commodity were central themes. Since the UST 10-yr yield broke the 1% level on 6 Jan, Malaysian stocks have stayed resilient, ie the FBM Emas Index, FBM70 and FBM Small Caps recorded positive returns during the period. A major reason for this positive performance are due to gains made by reflation and commodity-related stocks, led by Genting, Press Metal, TM, P Chem (refer Table 2). Smaller caps such as Air Asia, Lotte Chem, Guan Chong have seen their share price rose by more than 10% the past month amid rise in bond yields.

• Shift in US policy expectations – Higher rates may come sooner than expected. Bond yields can rise for a few reasons, but the key factor are market expectations that global economic growth strengthens and inflation rises. Estimate is now for the first Fed rate hike taking place several months ahead of its current guidance of December 2023. Taking this viewpoint, the ringgit may not see any material upside from the current level of 4.13 to the USD.

• Our pre-2Q21 view – Value and cyclical investing is deeply in motion. Several companies that were impacted badly by the 2020 recession, ie banks, tourism-related, and airlines—present a compelling opportunity particularly in an economy driven by a strong consumer comeback. These stocks are also carrying valuations which are at the lowest end relative to their history. The finance index meanwhile would do well in a period of rising MGS yield (refer Chart 1). We reiterate our contrarian call that glove stocks – particularly Top Gloves, Hartalega, Supermax – are starting to offer value when viewed against their pre-Covid 19 earnings multiples and dividend yield. We also recommend energy-related (Hibiscus) and consumer (Nestle, Dutch Lady, Padini) sectors.

Market leaders – value and cyclicals the comeback kids

We retain our conviction call on cyclical sector for 2021. We remain positive on consumer, commodity-related and industrial sectors that are seeing earnings revisions and eventual recovery in earnings. The banking sector is seeing improving outlook as well as sentiment, and based on its correlation with the 10-yr MGS yield should perform well in as rising yield scenario (refer Chart 1).

Malaysian glove companies have seen their share prices slumped by half on average. Despite record quarterly profits announced recently, 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 unclear. We think glove sector deserves investors’ attention currently, from a contrarian approach.

Source: BIMB Securities Research - 29 Mar 2021