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Coronavirus outbreak will delay, not derail, Bursa rerating

TheStar Wed, Jan 29, 2020 10:13am - 2 months ago


AmInvestment Research said in terms of sector, it was OVERWEIGHT on banks, consumer, electronic manufacturing services, oil & gas, glove (a surge in demand for gloves and expansion in valuation multiples during an epidemic) and utilities. “Our top picks are Maybank, Tenaga Nasional, RHB Bank, Westports, Kossan, Serba Dinamik, DRB-Hicom, MMC Corp, MBM Resources and Guan Chong, ” it said.

KUALA LUMPUR: AmInvestment Research believes the coronavirus outbreak will delay but it will not derail a potential rerating of Bursa Malaysia in 2020.

In its strategy report issued on Wednesday it said the catalysts included investors’ increased appetite for risk assets, particularly, emerging market (EM) equities including Malaysian equities.

However, the risk appetite would depend whether: (i) the US Fed is to maintain its narrative of not tightening monetary policy which shall keep the dollar’s strength in check; (ii) the sustained high equity valuations in developed markets (DM), prompting investors to look elsewhere for opportunities, including EM equities; and (iii) the US-China trade tensions are to ease; and (iv) the global recession risk is to continue to moderate.

AmInvest Research also cited a change in Malaysia’s perceived country risk premium following significant political events.

It also said there could be a play on the ringgit, driven by events such as: (i) FTSE Russell is to retain Malaysia in the World Government Bond Index; (ii) a steep rise in crude oil prices (Malaysia is a net exporter of oil & gas) on geopolitical tensions; and (iii) an end to the easing cycle with no further cut in the overnight policy rate by Bank Negara Malaysia in 2020.

According to the latest CNN reports, the 2019-nCoV outbreak, more commonly known as Wuhan coronavirus, has thus far infected more than 4,500 people globally and claimed 106 lives in China. To contain the spread of the virus, nearly 60 million people have been placed under partial or full lockdowns in Chinese cities.

As of Tuesday, stock markets all around the world have reacted negatively to the escalation in the outbreak, with no exception to FBM KLCI that lost 21 points or 1.4% to end 1,551.

“For now, we are maintaining our end-2020 KLCI target to 1,670 based on 17.5 times our 2020F earnings projection (+7.6%), which is at a discount to its five-year historical average of about 18 times, ” it said.

AmInvest Research believes the latest outbreak could be most comparable to the two major global pandemics over the last two decades, i.e. Severe Acute Respiratory Syndrome (SARS) in 2002/2003 and H1N1 in 2009/2010.

The SARS outbreak lasted for about nine months from November 2002 to July 2003. It infected about 8,000 people with a death toll of about 800 people globally.

During the epidemic, the KLCI lost more than 20% at the worst point, slipping from 794 (April 2002) prior to the outbreak to a low of 630 (April 2003).

The KLCI had stayed depressed for eight months from Oct 2002 to May 2013 at 630 to 671.

“We believe the weak performance of the market could also be partially attributable to consolidation or profit taking activities by investors, after a strong recovery from the burst of the dotcom bubble in 2001.

“Another interesting point to note is that after the epidemic was declared over, the KLCI had gained a hefty 231 points or 34% over the next nine to 12 months, rising from 671 in May 2003 to 902 in March 2004, ” it said.

AmInvest Research said the H1N1 outbreak lasted for about one and a half years from April 2009 to August 2010. The estimates of people infected and killed by the pandemic are still inconclusive until today.

However, the KLCI was indifferent to the H1N1 outbreak. Thanks to the ultra-loose monetary policy promulgated by major central banks in the world in the aftermath of the global financial crisis in 2008/2009, FBM rallied by 569 points or 65% from 873 (March 2009) prior to the outbreak to 1,442 (August 2010).

“While we are positive on the outlook for the market over the next 12 months, we believe investors should exercise caution over the next three to six months as it appears that the current 2019-nCoV outbreak will not go away or taper off anytime soon, and it will probably get worse before it gets better.

“More so, key stock markets in most parts of the world have been scaling record highs since the beginning of the year, leaving investors with plenty of room to take profits. We believe the downside risk to the local market is more limited given KLCI’s major underperformance in 2019.

“In terms of sector, we are OVERWEIGHT on banks, consumer, electronic manufacturing services, oil & gas, glove (a surge in demand for gloves and expansion in valuation multiples during an epidemic) and utilities.

“Our top picks are Maybank, Tenaga Nasional, RHB Bank, Westports, Kossan, Serba Dinamik, DRB-HICOM, MMC Corp, MBM Resources and Guan Chong, ” it said.


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