NEWS of a potential vaccine for Covid-19 early last week sparked a rotational play in global markets that saw investors rush into conventional stocks while pandemic-related counters were punished.

The FBM KLCI gained 50.44 points or 3.3% in the first three trading days of last week, on a trading volume of more than 10 million shares.  

Banking stocks were the star performers last week as the financial services index surged 9.1%, followed by the energy index (7.7%). However, the healthcare index lost 3.1%.  

Although Pfizer and BioNTech announced that their vaccine was 90% effective in preventing Covid-19 after the early vaccine trial, market analysts warned of volatility ahead as local corporate earnings remain lacklustre.

MIDF Amanah Investment Bank Bhd research head Imran Yassin Yusof sees the market rally as a knee-jerk reaction to the vaccine news flow. “That’s why you see a strong rise in value and growth stocks,” he tells The Edge.

“But the vaccines still need to go through the approval process before production is ramped up. We expect vaccines to be widely available in the second half of 2021 rather than sooner. Some investors are taking early positions in stocks that have been depressed, for example, banking counters.”

Nonetheless, Imran points out the downside risks in the economy, especially banks’ asset quality as a result of the loan moratorium. “We are going through another CMCO (Conditional Movement Control Order) and that will have some impact on earnings … We will get a clearer picture on recovery next year.”

Rakuten Trade head of research Kenny Yee says economic fundamentals and corporate earnings are still the key factors in determining the market direction. “I think the market outlook remains murky and there is no clear indication yet.”

He advises investors not to chase stocks that have gone up substantially but instead to adopt a bargain-hunting strategy when share prices fall. “There are always chances for investors to enter at lower levels.”

Citing the market rally as a rebound, Areca Capital Sdn Bhd CEO Danny Wong says the stock market “does not really look very positive” as it is mainly driven by sentiment and liquidity. “There is too much liquidity in the market. In this low interest rate environment, investors will use this opportunity to chase the market.

“Towards year-end and next year, there will be more news on vaccines. It is all within expectations, but the market will react to the news.”

Over the longer term, investors should look at companies with strong fundamentals, particularly blue-chip stocks that have good cash flows, he adds.

Foreign funds to return after Biden win

In the US, while Joe Biden has declared victory in the country’s presidential election, Imran says uncertainty will persist as “things can suddenly surprise on the downside”. However, he rules out a sudden crash in the equity market. He is maintaining his FBM KLCI year-end target at 1,400 points, pending assessment of the latest developments.

Wong believes the new political landscape in the US will bode well for global trade and growth, with Asia being the key beneficiary as the region is set to deliver the strongest growth post-pandemic. “If you look at the West, money printing will stay for a while due to the massive damage brought about by the pandemic. So, naturally, money has to flow to areas that could give more upside such as Asia, which will be more attractive, driven by the faster recovery pace,” he says.

“Although Malaysia may not be the primary focus, it will at least benefit from the spillover effects. Foreign funds will return; it is just a matter of time.”

Imran says the inflow of foreign funds since Nov 5 is a good sign for the equity market, which may in turn drive the rally going forward. “We have seen some positive fund flows. Our appreciating ringgit will help, but as the US market is rebounding quite strongly, this could negate some of the funds coming to Malaysia.”

For the week ended Nov 6, foreign investors turned out to be net buyers of RM115.14 million worth of equities. This was the first net inflow after seven weeks of consecutive net selling by foreign investors, according to an MIDF Research note dated Nov 9.

In a Nov 6 note, UBS Global Research says with a Biden win, it expects a less hawkish stance by the US administration on trade tariffs globally and an expansionary fiscal policy (US$450 billion) to meaningfully bolster confidence in emerging markets’ recovery prospects, sparking a recovery in their portfolio flows, leading to a strong performance through to end-2020.

In the bond market, foreigners are expected to continue to be net buyers of Malaysian bonds owing to the interest rate differentials.

Foreign portfolio inflows almost doubled to RM4.6 billion in 3Q2020 from RM2.4 billion in 2Q2020. On a quarterly basis, Malaysia recorded foreign debt inflows of RM10.6 billion, which more than offset equity outflows by RM6 billion.

Recovery plan to dominate market

In a Nov 10 note, AmInvestment Bank says the market will continue to shift from being predominantly pandemic-themed to being recovery-focused. “We have been advocating [that] investors lighten their positions in the ‘pandemic play’, that is glove stocks, and replace them with the ‘recovery play’.”

Sectors that are poised to benefit from the recovery in demand/pent-up demand post-pandemic are power, airports, healthcare and seaports, it adds.

However, AmInvestment Bank expects the market to be volatile as investors in glove stocks rush to the exit at the same time. The two FBM KLCI glove stocks — Top Glove Corp Bhd and Hartalega Holdings Bhd — have a combined weighting of 13% to 14%.

“We expect the gains in the recovery play to be significantly offset by losses in the pandemic play. This explains the rationale for us to maintain our FBM KLCI year-end target [at 1,530 points] despite this overwhelmingly good news,” it says.

Areca’s Wong says although glove stock prices will fluctuate in the short term, they are stocks investors should consider having in their portfolio. “Profits for glove stocks will remain in the next one year. Owing to the new norm, the demand is still there, but average selling prices cannot be too high. Overall, the industry is still positive in terms of earnings.”

Rakuten’s Yee believes that glove stocks will normalise as most of them are trading at a good premium. “Definitely, glove stocks will consolidate as investors are not that enthusiastic anymore,” he says.

AmInvestment Bank says while the fundamentals of banking stocks should improve in line with the economic recovery, clarity is still lacking with regards to the extent of the irreversible damage the pandemic has inflicted on businesses and hence, the asset quality of banks.

It upgraded AirAsia Group Bhd to a “trading buy” with a fair value of 68 sen, driven by the recovery in air travel, which has made the company’s earnings recovery more certain. However, it remains mindful of AirAsia’s need to recapitalise its balance sheet after months of massive losses following a collapse in air travel.

CGS-CIMB Research says in a Nov 11 note that besides glove stocks, investors may also take profit on technology stocks, which have done extremely well in terms of share price performance.

Despite that, Wong is of the view that the tech theme will remain attractive on the back of the 5G impetus. “Conventional companies have to embrace new technologies in their business model. That will drive the growth in the tech sector. It’s just that the valuations cannot be too crazy,” he says.

CGS-CIMB Research is positive on companies such as Genting Bhd, Genting Malaysia Bhd, Malaysia Airports Holdings Bhd, IGB Real Estate Investment Trust, IHH Healthcare Bhd and KPJ Healthcare Bhd, which will benefit when countries reopen their borders and the global economy recovers from the pandemic.

“For exposure to the economic recovery post-Covid-19, we favour the banking sector, which we recently upgraded to ‘overweight’ as we feel that most of the bad news has been priced in. Our top picks in the banking sector are Public Bank Bhd, Hong Leong Bank Bhd, RHB Bank Bhd and AMMB Holdings Bhd,” it says.

The research house says the media sector is also likely to see a recovery in advertising expenditure revenue. It adds that the oil and gas sector could benefit as well if crude oil prices recover on the back of higher oil demand, with its top picks being Yinson Holdings Bhd and Dialog Group Bhd.