• Stocks weaker on rising Covid-19 cases. The stock market continues to languish and lag the general Asia market, as local Covid-19 cases continued to march upward to record highs, breaching the 7,000 and then 8,000 levels last week. Malaysian stocks scrambled to another lacklustre weekly performance and likely to end the first half of 2021 on a weak note, as large local institutional funds remained mostly sidelined. However, net foreign participation rose for the second straight week to RM190m, whilst retail investors remained net buyers.

• The indefatigable recovery theme is facing its stiffest test. The early recovery and strong rise in commodity prices validated our view that stocks will benefit from these 2 themes this year. Globally and domestically, there have been tangible signs of economic recovery and this has translated into higher corporate earnings for 1Q21. We have seen selected industrials, technology, plantation and banking registering improvement in yoy earnings. However, the rise in input costs in several sectors – due to supply chain pressure and higher commodity price – has been quite material and likely to affect companies’ profit margins during the remaining of 2021.
• Pain before gain – Covid-19 will taper once vaccines administered aggressively. Investors have been spooked by the dramatic rise in Covid-19 cases in Malaysia. Within the space of 6 months Malaysia’s management of the infection has deteriorated as lockdowns in January and emergency declaration failed to curb Covid-19 cases – and in fact lack of enforcement and perhaps complacency have contributed to cases spreading swiftly the past month. Malaysia is currently grappling with the issue of finding the right antidote to effectively administer vaccines to the heart of the problem. Our base case – this will improve the next 2 months as vaccines are being delivered thick and fast, and majority of Malaysian adults will be vaccinated.
• Stocks moving into mid-cycle recovery. As we enter the second half of the year, the V-shaped growth seen in early part of the year, ie exports and commodities, will likely diminish. Also, the current stricter MCO or full lockdowns will likely create a pushback on economic growth with impact seen in 2Q earnings. We could see continued weakness in stocks over the next 2 months until investors are convinced that the worst of Covid-19 is behind us. During this period we favour 5 companies least affected by a full lockdown, ie MyEg, Inari, Lotte, MPI, and Westports.

Source: BIMB Securities Research - 31 May 2021