Economists and investors will focus on the FOMC outcome and developments in the Ukraine-Russia conflict for leads

by S BIRRUNTHA / pic by TMR FILE

VOLATILITY is expected to remain high in a trading week as economists and investors will focus on the Federal Open Market Committee (FOMC) outcome on March 17 and developments in the Ukraine-Russia conflict for leads.

RHB Investment Bank Bhd stated that peak bearishness across asset classes in approaching with bad news such as the geopolitical risks, inflation, high commodity prices concerns, stagflation fears and the US Federal Reserve decision priced in by the market ahead of a recovery in investor sentiment in the second quarter.

Local investors will have to contend with potentially increased political risk as Barisan Nasional’s win in the Johor state election raises the calls for an early general election despite the high number of Covid-19 infections in the country.

The FTSE Bursa Malaysia KLCI ended the trading week 12.31 points lower, or 0.78% to 1,568.22 and for the trading week, the benchmark index closed 35.72 points lower.

“Investor sentiment is likely to remain cautious amid heightened market volatility moving forward,” a dealer from a local brokerage told The Malaysian Reserve.

Despite all the risk factors in play, analysts are positive on the corporate outlook for 2022 supported by optimism about the resumption of economic activities and positive growth in earnings.

Below are the five sector stocks that have been chosen by research houses and analysts as potential investments in the current climate.

Plantations

Palm oil stock levels are expected to rise by 4.6% month-on-month (MoM) to 1.59 million tonnes by end-March 2022, with output and exports rising by 15% and 6% MoM, respectively, according to CGS-CIMB Securities Sdn Bhd.

The brokerage expects crude palm oil prices to trade at a wide range of RM6,000 to RM7,500 per tonne in March due to uncertainties over the availability of sunflower oil crop from Russia and Ukraine.

The high price could remain for longer if global edible oils supply remains tight despite the fears of demand destruction due to the high prices.

The firm said Indonesia’s decision to increase its domestic market obligation percentage to 30% from 20% effective March 10, 2022, will impact market price.

“Indonesia’s move to further restrict exports of palm oil will tighten the availability of palm oil in the export market as exporters may need time to fully fill the new export ruling which we gathered had caught the industry by surprise.

“This could keep prices high at the current level of RM7,410 per tonne until the Ramadhan festival in May in the short term, before trending lower in the second half of 2022,” it said in a recent note.

The firm has kept a ‘Neutral’ rating on the overall sector, and its key picks are Kuala Lumpur Kepong Bhd, Genting Plantations Bhd and Hap Seng Plantations Holdings Bhd.

Amid the Ukraine-Russia conflict, some analysts believe there are trading opportunities in financially able companies in the O&G industry

Oil and Gas

While the Ukraine-Russia conflict continues to weigh on market sentiment, some analysts believe there are trading opportunities in financially able companies in the oil and gas (O&G) industry that stand to benefit from higher crude oil prices.

The optimism is based on the expectations of a sustained upward cycle in global energy prices which will spur upstream activities and contract awards.

Hong Leong Investment Bank Bhd (HLIB) expects companies with upstream exposure to benefit from the high energy prices that include Hibiscus Petroleum Bhd and Dagang NeXchange Bhd (DNex).

HLIB has a ‘Buy’ call on DNex with a target price of RM1.64 due to its 90% stake in Ping Petroleum Ltd. Ping in turn has a stake in the Anasuria field in the North Sea and is jointly held with Hibiscus.

National oil company Petroliam Nasional Bhd (Petronas) turned to a profit of RM13.36 billion in its fourth quarter ended Dec 31, 2021 (4Q21) versus losses of RM1.137 billion it suffered in 4Q20, underpinned by an improved performance of the upstream, natural gas and new energy segments.

As a result of higher energy prices, Petronas’ quarterly revenue also rose 73.9% year-on-year to RM76.571 billion.

Technology

The technology sector’s outlook is expected to remain bright throughout this year, underpinned by the advent of 5G technology, increasing smartphone shipment, emergence of digital solutions in business and growing electric vehicle market.

MIDF Amanah Investment Bank Bhd is maintaining a positive stance on the sector given, through innovation and invention, this sector continues to benefit from digital proliferation and is now integrated into all other sectors such as healthcare, financial, real estate, logistics and manufacturing.

Kenanga Research remains bullish on the sector as it continues to observe aggressive expansions among local and global semiconductor players.

Its top picks for the sector are Kelington Group Bhd, GHL Systems Bhd and Inari Amertron Bhd.

Valuations of technology stocks have also improved with most trading substantially below their highs of last year amid the heavy selling pressure on the local bourse.

Analysts, however, maintained an ‘Overweight’ call on the tech sector as earnings growth is still decent and the interest in the stocks will be fuelled by bargain hunting activities.

Banking

Brokers believe the recovery in the overall economy will benefit banking stocks while their low valuations are a key attraction for institutional investors looking for dividend paying stocks.

With the expected increase in the Overnight Policy Rate (OPR) in 2022, earnings of banks are expected to naturally improve.

HLIB has an ‘Overweight’ call on the banking sector as valuations are undemanding and expectations of the OPR upcycle will benefit banks.

Its analyst Chan Jit Hoong stated that the sector’s risk-reward profile is skewed to the upside as valuations are undemanding and at the cusp of an OPR hike upcycle with economic recovery.

Chan has projected a two-year aggregate earnings compound annual growth rate of 10.1% (2021 to 2023) for the banking sector.

“The 4Q21 was a fairly decent quarter with sector profit rising 42% year-on-year on lower loan loss provision,” he wrote in a recent report.

He added that Affin Bank Bhd’s, Alliance Bank Malaysia Bhd’s and Malayan Banking Bhd’s earnings beat expectations while CIMB Group Holdings Bhd, Public Bank Bhd and RHB Bank Bhd were in line but AMMB Holdings Bhd and Bank Islam Malaysia Bhd were below expectation.

Tourism or Leisure

As Malaysia has geared up to transition into an endemic phase, tourism-related stocks look to be catching the eye of some analysts and investors given the limited downside risk.

Aviation stocks such as Malaysia Airports Holdings Bhd were among the top gainers on Bursa Malaysia last week on the news Malaysia will reopen its borders to international visitors from April 1.

Fully vaccinated travellers will be allowed to enter the country without quarantine from April 1, two years after borders were closed due to the Covid-19 pandemic.

Genting Malaysia Bhd has also opened its new theme park which could be a catalyst that pushes the group’s earnings higher.

Nevertheless, CGS-CIMB Securities noted that the travel industry is very much dependent on whether there will be new virus variants and travellers’ behaviour.

The brokerage is not sure whether people will be more cautious or if companies will allow their staff to travel as travel will be costlier due to higher fuel prices and other costs.