Sluggish KLCI needs impetus

Upside potential for stocks with China export and reopening exposure – Downside risk for technology, semiconductor stocks

by M JAY SHEILA

THE local stock exchange is seeing some action for a short period but is in critical need of global and government impetus to continue buzzing again.

Against an uncertain and volatile economic and market condition, investment experts are advising investors to keep a defensive strategy by having a portfolio of good stocks.

Stocks with risky downsides such as technology and semi-conductor should be avoided while corporates with China export exposure and potential beneficiaries to the Chinese economy reopening should be closely watched.

Veteran fund manager and Capital Dynamics Sdn Bhd Group MD/CEO Tan Teng Boo said, Bursa Malaysia has been on the downtrend since 2018 and it’s not going to end soon.

“There are still no good reasons, economic, political, or corporate, for us to revise our worried outlook for the FTSE Bursa Malaysia KLCI (FBM KLCI),” Tan told The Malaysian Reserve (TMR).

A founder of a corporate finance advisory firm concurred on the lacklustre state of the local stock exchange that can’t even hold a candle against regional stock exchanges.

In an interview, Astramina Advisory Sdn Bhd founder/MD Datin Wong Muh Rong said that Bursa Malaysia is currently not as attractive as the neighbouring stock markets.

“Quite a number of foreign houses, the latest being CLSA, have downgraded Malaysia on the back of its expensive valuations and poor earnings per share growth. There is no exciting growth prospects nor defensive quality in the market presently. We don’t have a dividend yield story nor a ringgit revaluation play.

“Indonesia and Vietnam are seen as more attractive emerging markets. Furthermore, with China having abandoned its ‘Zero Covid’ policy, many investment houses are back to increasing a higher weightage on China,” said Wong, a lawyer and accountant by training, who is also a licensed capital market and services representative licence holder (CMSRL) as sanctioned by the Securities Commission (SC).

In a strategy report released last month, CGS-CIMB Securities Sdn Bhd (CGS-CIMB Research) predicted that 2023 could remain challenging as corporates adapt to the new policy and political landscape post-15th General Election (GE15) and adjust to slower global growth (mild recession in US), tighter monetary policy (further rate hikes in 2023F) and ongoing geopolitical tensions (Russia-Ukraine war leading to higher commodity prices).

“We think downside could be capped by expectations of a stronger FBM KLCI earnings growth of 12.8% in 2023F (vs -2.9% in 2022F) and the FBM KLCI’s undemanding valuations….Also, foreign shareholdings are close to their historical lows, and domestic institutional investors could turn net buyers in the market on improved liquidity,” it said in the report running over 300 pages.

In the same report, the research house said it had raised its end-2023F KLCI target to 1,633 points. The FBM KLCI ended at 1497.55 last Friday.

It noted that Malaysia was the worst performer, year-to-date as at mid-December 2022, compared to Indonesia, Singapore and Thailand markets.

To get a handle on the local stock exchange, The Malaysian Reserve (TMR) spoke to several market players. Here are excerpts from TMR‘s interview with Tan.

In such a highly uncertain economic landscape and volatile market conditions, a better strategy is to have a portfolio of good stocks, says Tan (pic: Habhajan Singh/TMR)

TMR: We have moved into January 2023. What is your outlook for the local stock market for 2023?

There are still no good reasons, economic, political, or corporate, for us to revise our worried outlook for the FBM KLCI. The Bursa Malaysia outlook is uncertain given the looming global recession, China’s reopening and Malaysia’s uncertain political outlook. With a new Malaysian government, i-Capital’s long-term outlook of the FBM KLCI is dependent on what the new government does and whether it can survive long enough to carry through key socioeconomic policies.

TMR: What are the sectors that you would avoid in the coming months? Why?

The semiconductor and technology sector still has room for further correction. Global semi-conductor sales have been plunging and tech layoffs in the US in the third quarter of 2023 (3Q22) have already surpassed the level reached in mid-2020 when the US economy collapsed in the early days of the Covid-19 pandemic. Yet, the US recession has not even begun. Besides rising interest rates, the semiconductor sector also faces headwinds such as excess manufacturing capacity coming onstream amid slowing demand and major developed economies entering a recession in 2023.

TMR: What are your top stock picks for 2023?

In such a highly uncertain economic landscape and volatile market conditions, a better strategy is to have a portfolio of good stocks. For investors who do not have the time or experience, they should invest in icapital.biz Bhd. Despite a very tough and rough environment, icapital.biz has achieved superior NAV and share price returns of 15.74% and 9.35% respectively for the two years ended Jan 11, 2023. Both have strongly outperformed the 10.74% plunge in the bellwether MSCI Malaysia index.

Nevertheless, for 2023, there are some stocks that will benefit from the reopening of China. Special situation stocks like Suria Capital Holdings Bhd also deserve a look.

Impending Recession

TMR: In our report in October 2022, you were quoted: “The question is not whether the US is going to experience a recession, but how serious, how deep will it be? And how will the recovery be? So, next year, we’re going to see a big part of the world economy in recession.” Any change in the above view? Why? What is the latest take on the prospects of a recession in the US?

Based on the term spread, which is the difference between the 10-year bond rate and the 3-month bill rate, this yield curve model is signalling that the chances of a US recession have shot up to the highest level since the early 80s. It is higher than before 2020, 2008, 2000 and 1990 recessions started.

Based on the historical readings of the yield curve model, a 47.31% probability reading for November 2022 is like a certainty. Except for the 1980 and 1982 recessions, the yield curve model has never had to reach such heights before the US economy enters a recession. 2023 is like a sure bet.

The battle against the high US inflation rate is far from over. The present decline in the US headline inflation rate is due to the fall in energy prices. At 5.7% for December 2022, the core inflation rate is lower than its peak in September 2022, but not by much. At the same time, US energy inflation has recently fallen at a steep pace. The cost of energy in the US increased at a much slower 7.3% year-on-year in December 2022, down significantly from a 13.1% rise in November. It was the lowest reading since February 2021, owing to a drop in gasoline prices and a slowdown in fuel oil demand

Should US energy inflation bottom out or reverses its trend, the headline US inflation will come back with a vengeance. Crude oil prices started falling sharply from June 2022 onwards, but of late, this fall seems to be bottoming out. There are several factors, such as China’s reopening, that can cause crude oil prices to jump back to its previous peak or even surpass that peak. Such a reversal will quickly bring back all kinds of inflationary pressures again. This will surely force the Federal Reserve (Fed) to be even more hawkish in its monetary policy tightening.

In addition, the Fed has also been engaging in unprecedented “quantitative tightening”, a process in which it is allowing proceeds from maturing bonds to roll off its balance sheet each month instead of reinvesting them. After some reductions, the balance sheet of the Fed still stands at a massive US$8.63 trillion (RM36.59 trillion). This hefty reduction in the Fed’s balance sheet, together with aggressive rate hikes, is even more unprecedented. Lastly, what is very worrying is that these tightening moves will continue in 2023, a year when the US GDP is forecasted to be near recession levels. (Adapted from i-Capital, dated Jan 14, 2023).

TMR: How does it impact Malaysia?

The forecasted contraction in the global semiconductor and technology sector will hurt the Malaysian economy. The latest Malaysia export figures pointed to softening external demand and may even contract in the coming months as the US, UK and European Union (EU) economies contract before the Chinese economy picks up momentum.

As I have said previously, while economic growth and development need political stability, in turn, political stability needs sustained economic growth and development, without which a country will quickly slip into chaos and disorder.

In Malaysia’s case, she needs a government that is strong and forward-looking enough, along with political leaders who are capable and willing to tackle a lot of long-term structural problems, which is not possible without political stability and good leadership. This is especially crucial at this juncture.

TMR: How does it impact the equity investing community?

As i-Capital has been advising for quite some time now, the next leg in this US bear market will reflect weak corporate earnings and a serious 2023 recession. The S&P500 and NASDAQ would have to fall further before they can begin a new sustainable rally. The NASDAQ Composite is expected to easily plunge another 25%-30%. Unfortunately, Bursa Malaysia will be affected if the New York stock markets decline substantially.

TMR: What are the options for the equity investing community as they negotiate 2023?

I forecasted a rolling type of global recession, one where different segments of the economy will be in different phases of boom and bust, in contrast to a typical recession where more or less all sectors will experience a contraction at more or less the same time. If we are unlucky, the full recovery of sectors such as automotive may be delayed as the US economy enters a recession. As such, they may not mitigate the contraction in the other segments of the US economy in 2023.

China Impact

TMR: When we last met you, you were “very optimistic” over China’s long-term prospects at a time when some investment houses were exiting on what seemed like adverse political news. Any change in that view? Why?

The annual Central Economic Work Conference was held in Beijing on Dec 15-16, 2022, as Chinese leaders decided on the priorities of economic work in 2023. From the conference, it is clear that the country will focus on boosting domestic demand in 2023. The Chinese leadership has also pledged to keep the state and private sectors on equal footing, to support the private economy, and to protect the property rights and interests of private entrepreneurs.

The lifting of the pandemic restrictions now is like allowing streams of fresh air to come into China’s economy and re-ignite her energies for economic growth and development. Over the next five to 10 years, China will become the largest economy in the world.

TMR: How do they impact Malaysia?

China’s reopening of her borders will see the second-largest economy in the world bounces back with a vengeance, especially in the second half of 2023. For the Malaysian economy, China’s recovery in 2023 looks like it will be another stroke of luck. In 2019, 11.9% of Malaysia’s total visitor arrivals came from China. In 2021, Malaysia’s exports to China formed 12.4% of Malaysia’s GDP with China being her largest export market. In 2021, China took 16% of Malaysia’s total exports — if Hong Kong is included — China took a hefty 22.4%. China’s reopening is happening at the right time for Malaysia.

The resumption of travel activities by the Chinese people would be a huge boost to the Malaysian and global economies at a time when the US, UK, Japan and the EU are heading into recessionary conditions.

Companies that have exposure to the Chinese export market and will benefit from the reopening of the Chinese economy.

TMR: How can the equity investing community in Malaysia take advantage of the opportunities?

They can invest in good Chinese/ Hong Kong stocks or Bursa-listed stocks which have exposure to the Chinese export market and/or will benefit from the reopening of the Chinese economy. Alternatively, they can consider investing in some of our funds, for example, the i-Capital China Fund, which has substantial exposure to Chinese stocks.