Macquarie Equities Research (MQ Research) is upbeat on economic reopening, anticipating a V-shaped recovery with the July/August vaccination surge, but remain selective on picks and mindful of volatility from inflation/tapering risks and political uncertainty. MQ Research has a 12-month FBM KLCI target of 1,700, expecting gloves’ valuations to hold up well despite the declining earnings from lower average selling prices. Further, with plantations losing its shine as a defensive, MQ Research anticipates consumer staples could become the focus.

Positive economy but nuanced on market outlook

• MQ Research anticipates a V-shaped recovery in economic sentiment will be triggered by the July/Aug vaccination surge, declining infections, and easing of lockdown restrictions. The exuberance from economic reopening will be the short term (ST) dominating force in the stock market in 2H21, drowning out (temporarily at least) other risks like tapering and politics, with sentiment potentially overshooting fundamentals on the upside. However, MQ Research is selective on reopening plays: RHB, TM, Maxis, Bursa and GHLS. The world remains highly uncertain, with many volatility drivers on the horizon. MQ Research recommends staying weighted in tech/thematics and exporters, and trading out value rallies for defensives. Coupled with MQ Research’s aversion for ESG-risk sectors, its 12MKLCI target is 1,700.
• The property sector is MQ Research’s high beta pick for reopening – MQ Research anticipates a vibrant post-lockdown property market could see sentiment carry over into the stock market. However, fundamentals for developers remain weak, and an MQ Research analyst recommends trading the momentum and selling into strength.

Act Ahead of ESG Risks

• Much handwringing has been had as environmental, social and governance (ESG) considerations mount. MQ Research says act now and sell sectors faced with obvious structural ESG challenges but no obvious ST remedy. An MQ Research analyst has been a thought leader with a non-consensus underweight on Plantations and a street-low target price (TP) of RM8.50 on TNB. On top of deforestation, poor labour practices (link, link) have been exacerbated by Malaysia’s downgrade to tier-3 by the US State Department’s Trafficking in Persons report. Long replanting cycles limit planters’ ability to reduce labour dependency in the ST (e.g. automation). Meanwhile, MQ Research remains skeptical of TNB’s long-discussed plans to carve out the coal-heavy generation business, which would remove the ESG discount on the transmission unit (potential +39% bull case).

Risks: tapering, politics, labour, variants to drive volatility.

• MQ Research recommends investors build portfolios for resilience, ahead of increased volatility going forward. MQ Research recommends staying overweight in tech/thematics, exporters and defensives. Not only did tech/exporters outperform during ‘13/14 tapering, it aligns with MQ Research’s weak ringgit outlook (4.25 by FY22), and is well hedged against domestic political uncertainty and variant outbreak scenarios. On value rallies, trade out for defensives to improve resilience.
• Within tech MQ Research likes GHL, INRI and ViTro. Baked into its KLCI forecast, MQ Research expects gloves’ valuations to hold up well despite the declining earnings from lower average selling prices (ASP). Lastly, with plantations losing its shine as a defensive, MQ Research anticipates consumer staples could become an even more crowded trade. Under MQ Research’s coverage, DLG and GMB are relatively undervalued defensives it likes.

Source: Macquarie Research - 12 Jul 2021