Fundamental driven investing advised as economy recovers

Penny stocks rally may fizzle out as market players start to focus on more solid fundamental counters moving forward


THE price rally in penny stocks on Bursa Malaysia driven mainly by retail investors could see a loss of momentum as the economic and corporate earnings recovery gains traction in the second half (2H) of the year.

Malacca Securities Sdn Bhd head of research Loui Low said the penny stocks rally may fizzle out as market players start to focus on more solid fundamental counters moving forward with the hope they provide more upside potential as businesses recover in the 2H.

“Rally in selected sectors such as technology and glove-related stocks may have some upside as traders could be waiting for the peak of earnings for the stocks before selling off the shares.

“We think short-term wise, the upside for the small-cap and ACE Market stocks is limited based on technical analysis,” he told The Malaysian Reserve last Friday.

With the loan moratorium ending soon, Low believes the retail funds may pull out from stock markets to survive outstanding loans.

“The short-selling ban until year-end should cushion the downside risk,” he added.

The FTSE Bursa Malaysia KLCI (FBM KLCI) has fallen below the 50-day simple moving average and Low expects a downward bias for now as the benchmark may look to retest support at around the 1,500 point level.

“Investors could still crowd around glovemaker stocks until the peak in earnings and monitor the glove’s average selling price trend until it has not much growth, after which we may see tapering buying support,” he explained.

He added that investors will likely stay invested in technology stocks while sectors such as oil and gas (O&G), property and construction could see some interest as the stocks look cheap and may see a rerating catalyst moving forward.

For O&G, Low talks of a need to see a good breakout in the Brent oil contract price above the US$45 (RM189) barrel level, while property and construction may see some upside should there be fresh news flow on infrastructure mega projects.

“We believe the various movement restrictions have contributed to the weaker earnings and recovery will be seen in 2H, as most of the counters share price have priced in the negatives. So, we are likely to see a rebound from this point,” he said.

Bursa Malaysia could see a sustained recovery in 2021 driven by the impact of fiscal stimulus measures, accommodative central bank action and sustained support from retail investors.

UOB Asset Management (M) Bhd (UOB AM) CEO Lim Suet Ling said the firm remains positive on Malaysia’s long-term investment potentials despite the FBM KLCI’s current lacklustre performance.

“Despite the FBM KLCI’s current lacklustre performance, we remain positive on Malaysia’s long-term investment potentials.

“While financial markets globally are still coping with the fallout from the impact of the pandemic, governments and central banks, including Malaysia, are rolling out unprecedented fiscal and monetary policies to support their economies,” she said at the firm’s market outlook for 2020 online media briefing last Wednesday.

As for the catalysts that would drive the market going forward, UOB AM CIO Francis Eng said the unprecedented government policy has been the big driver in the market recovery.

“On the fiscal side, governments continue to look at the fiscal stimulus and in fact, the US is considering another fiscal package which is being debated by the lawmakers there.

“If we continue getting stimulus and if the central banks continue to be very accommodative, we think this will help to drive markets.

“And as we get to the year-end, people will start to look at 2021, and if there are sufficient signs of recovery going into 2021, this would be a significant catalyst for the market,” he said.

Eng said returns will be more modest but with careful stock selection, investors can still get quite decent returns from the equity market.

“Over the midto longer-term views, equities have shown they have the ability to generate positive returns. So, there’s potential for capital appreciation as well.

“The fixed-deposit (FD) rates are expected to remain low for quite a long time because it would take a while for us to get out and fully recover from this Covid-19 pandemic.

“If FD rates remain low for a long period of time then other asset classes including equities, which we think retail investors will look at it quite seriously for a pickup in returns,” he said.

Eng dismissed the possibility of the FBM KLCI getting dragged down going forward, given the increased weightage carried by the likes of Top Glove Corp Bhd and Hartalega Holdings Bhd, as a Covid-19 vaccine is found leading to investors shifting focus from glove players.

“The glovemakers are a big sector which forms 17%-18% of the FBM KLCI weightage. If some of the investors start changing to the remaining 82%-83% of the market, it could even out or have a positive impact, as the other segment of the market is much larger,” he said.

UOB AM stated, in the near term, it prefers utilities stocks as they are generally more defensive business even in an economic slowdown and have very strong cashflows, which would translate into sustained dividends.

It likes the tech sector for its good medium- to long-term growth prospects.

“We like healthcare as there are attractive opportunities within the pharmaceutical space. If you have a medium-term view, say within six to 12 months, banks may start to look interesting again, especially if we get a positive development on the vaccine,” Eng added.

Commenting on the possible rebound in margins for banks, Eng said Bank Negara Malaysia (BNM) has projected the economy will recover in 2021, which would improve the banking sector’s fortunes.

“In 2021, BNM projected the economy would recover. Factors that have affected banks, such as weak economic conditions and the sharp decline in interest rates will no longer be a negative factor as we move into 2021.

“If we get an economic recovery as forecast, the fortunes of the banks will probably improve and with rate cuts to such low levels, further rate cuts probably not going to be there and there will be less pressure on interest rate margins going forwards,” he said.

Eng added that investors should not extrapolate the returns that have been seen in the last two to three months to the coming quarters.

“Even if we don’t get a sharp rise in markets, there are enough opportunities if investors employ the right stock-picking strategy,” he said.

Eng also added that having a year-end target for the FBM KLCI is not very relevant under the current market condition.

“If you look at projections of market earnings, the variance is large and this makes it hard to have a meaningful index target”, he said.