LITTLE TO NO ALPHA LEFT IN THE MARKET

2022 was a tough year for technology stocks and basically any growth company that capitalized on a decade-long period of easy money. Now, growth stocks have been significantly outperformed by value stocks without any sign of weakness. Malaysia is a financial market with a lot of companies trading at a rather cheap valuation due to its unstable political climate and dependance on commodity such as palm oil and major trading partners such as China.

As we head into 2023, analysts are turning bullish on China and Hong Kong. Commodity prices such as palm and crude oil remain elevated which would indirectly benefit countries with significant commodity exports. Additionally, rates strategists are predicting a possible peak in interest rates by the end of 1H 2023 which could indicate a major inflection point in financial markets globally. 

However, all of the above is useless speculation without actual capital allocation. So, here is how I would play the equity market in 2023 as someone who loves and watches the market (almost every day). This is how retail investors can outperform KLSE index in 2023 without relying on insider information because we all know that the local market is highly corrupted and rife with insider trading activities.

1. Do not listen to sell-side analysts: Cautiously optimistic on Energy Companies (Hibiscus, Coastal Contract)

Recession fear is not overblown and remains a legitimate concern for most equity and fixed income investors. Energy stocks and commodity prices are often one of the leading indicators of a possible economic recession.

When sell-side analysts turn bullish on energy companies (JP Morgan, Goldman Sachs, local brokerage), it is time to plan your exit in energy companies. However, I do not think this is time to plan for an abrupt exit because energy stocks in Malaysia remain uninvested since most investors experienced severe PTSD (post-traumatic stress disorder) from losing a lot of money buying energy companies such as Serba Dinamik and Sapura Energy. Many investors in Malaysia are bearish on local energy companies due to the excessive reliance/dependence of these companies on government handouts and contracts (Petronas and GLCs). 

At the same time, we do not know how successful the China reopening theme would continue to play out. Oil prices is almost impossible to predict and one bad news from China could cause oil prices to fall below the perceived "floor price" which is about 75 - 80$ per barrel according to oil analytics companies and energy analysts. If you cannot withstand the heightened volatility, it is best to avoid playing the short-term movement in energy stocks. 

Malaysian energy companies are mostly uninvestable indeed. We do not have companies with perfect cash flow and oil&gas exploration except Hibiscus Petroleum. I would avoid the sector entirely. But if you REALLY want to have allocation in the energy sector, buy Hibiscus. Coastal Contract is a good trading buy (not a good long term hold).

My favourite energy companies are Hibiscus. Still, I do not think Hibiscus is trading at a cheap valuation right now.

2. Tech companies will trade sideways for quite some time (especially in Q2 2023)

I would not look at the share price of Tesla and apply that to the local semiconductor companies because the underlying catalysts are drastically different. Local semiconductor companies remain fairly resilient due to the ability to benefit from cheap labour and provide low-tier services to other major industry players in China and Taiwan. In the first half of 2022, local tech/semiconductor companies experienced heavy sell-off as a result of China's Covid Zero policy which exerted a negative impact on the bottom-line earnings of companies such as Malaysian Pacific Industries and Unisem Berhad. These two companies will most likely experience little growth for the next few quarters but the core business (outsourced semiconductor assembly and test) should remain strong and fairly resilient provided that semiconductor lead time stays unchanged. 

My favourite tech companies are Greatech Technology Berhad (short term Greatech will perform poorly), Inari

3. Distressed investing will be a very profitable factor in 2023

Companies which were heavily impacted back in 2020 during the Covid pandemic have been crushed by the market for a long time. These companies were mostly on the brink of collapse and almost ended up as another statistics on the PN17 list. However, as we head into 2023, some of these companies have successfully been revived thanks to economic re-opening and a surge in investor confidence as a result of political stability. Factories that were closed during MCO are now running at full utilisation rate. Order books have been restored (almost 100%) as clients go into panic-buying mode in order to meet increasing demand from consumers. A true demand shock that we have never witnessed before. 

Valuations matter much more in 2023 compared to 2020 - 2021. Do not focus on stories when investing in small and mid caps. Book value is also no longer a reliable fundamental indicator, contrary to popular beliefs. It is best to calculate the forward PEs yourself and invest in companies that you personally understand. If you work in steel sector for example, you will know how to calculate the future earnings based on assumptions that you are familiar with rather than relying on watching the individual price chart of steel rebar. 

Some of my favourites right now are Karex Berhad (healthcare), Apex Healthcare (healthcare), Hextar Global (industrials), K. Seng Seng (industrials), and many more. 

4. You just won't and cannot lose from buying leisure/gaming companies. It is a no-brainer investment. Good trading buy before 2H 2023 before tourism hype eventually fades after the initial spike.

From Genting Malaysia Berhad to Airport Malaysia, it is impossible to lose money investing in these companies at this point as Malaysia continues to receive an influx of international and domestic tourists. Many hotel chains in Thailand are raising average room prices as hotel bookings continue to surge to historical highs. It is expected to have a spillover effect across many tourist destinations in Malaysia such as Penang, Kuala Lumpur and Pulau Langkawi. Almost everyone expects a boom in the tourism sector and it has not been fully priced in yet.

5. Short-term traders will still have a great year in 2023 as volatility builds. IPO volumes will most likely head lower in 2H 2023

It has been a trader's market since November 2021 as stocks no longer "just go up". As monetary conditions tighten globally, it is becoming harder to generate alpha in a market full of stocks trading at expensive valuations. This contributed towards the rise in momentum/trend-following strategies with the help of reading macro events. Currently, economic uncertainty is at an all time high since 1980s and 1990s. In the Malaysian context, momentum strategy never works because management usually dumps their shares on retail investors right after earnings calls. Instead, following management moves (based on Bursa exchange fillings) and inversing positive newsflow has proven to be a much more profitable strategy than the textbook trend-following strategy. I am confident that this will continue to be the profitable strategy for the rest of 2023

2022 was a terrific year for IPOs. Investment bank advisors and corporate lawyers made a lot of money from IPOs in 2022. Whereas retail investors were forced to "try their luck" by applying for IPO balloting. Will this trend continue? Definitely not. Once again, IPO volume is a lagging indicator of equity markets so do not rely on this indicator to predict where the markets will go. When IPO volumes revert to the mean (back to pre-Covid levels), that's about when equity markets have already hit the bottom and ready for the next recovery.

Top Holdings/Favourites by Sectors

1. Kotra Industries/Karex Berhad (Healthcare)

2. Genting Malaysia/Genting Berhad/Airport Malaysia Berhad (Travel/Leisure/Gaming)

3. Coastal Contract (Trading Buy only) /Hibiscus Petroleum (Energy)

4. Time Dotcom (Telecommunication)

5. Small caps 

Jentayu Sustainables 

SDS Group Berhad

Kawan Food

Karex

KSSC

Lion Industries

CYL Industries

Public Packages Holdings Berhad

Wishing all Malaysian investors the best and let's go make some money!!!

(Opinions are my own, Transact the above securities at your own risk)