IT has been a tumultuous four months for Malaysian equities, and analysts warn of further volatility ahead as a possible recession looms, caused by the Movement Control Order (MCO) and cautious consumer sentiment. Investors are advised to stay defensive and invest in stocks that have defensive earnings qualities and strong fundamentals.

Imran Yusof, senior analyst at MIDF Research, believes the FBM KLCI will face some downward pressure, given that sentiment is likely to be hit by weak economic data and corporate earnings, which are scheduled for release in the next couple of months following nearly two months of economic stagnation.

“Therefore, there might be another downward thrust in the direction of the FBM KLCI. In addition, a bear market generally follows a three-wave pattern, whereby the downward thrust (which we saw in March) would normally be interrupted by an intermittent rebound and subsequently followed by another downward thrust,” Imran tells The Edge via email.

The benchmark index kicked off the year at 1,611.38 points, but had plunged 24.3% to 1,219.72 as at March 19, the second day of the MCO.

However, the index has since gained some lost ground, and finished last Thursday at 1,407.78 — a tad higher than MIDF’s year-end target of 1,400.

Currently down 12.6% year-to-April 30, the FBM KLCI is faring better against its regional peers, although, to be fair, it was lagging behind the region prior to the Covid-19 pandemic. The Indonesian market is currently down 25.4%; Thailand, 18.8%; Singapore, 18.6%; Vietnam, 19.97%; and the Philippines, 27%.

Vincent Khoo, head of research for Malaysia at UOB Kay Hian, is of the view that the market will be firmer towards the year end but foresees a consolidation period in the nearer term for two main reasons — first, there has been a significant rebound of the index and, second, the market is likely to reflect a sluggish post-MCO domestic consumption trend.

“The market should firm up towards year end as consumption strengthens and amid expectations that a cure or vaccine for Covid-19 would by then be near,” he says, adding that UOB Kay Hian is reviewing its 1,440 points target, given the likelihood of further earnings downgrades through 2021.

Given the heightened uncertainty and volatility in the market, Imran suggests investors consider stocks that are more defensive, regardless of the status of the MCO.

These include those that have been somewhat overlooked in favour of glove counters, especially as the country moves towards normalisation post-MCO.

Imran points to Tenaga Nasional Bhd and IHH Healthcare Bhd, which have solid fundamentals and defensive earnings, as well as counters that may not be defensive at first glance but have some defensive earnings qualities, such as Dialog Group Bhd and Axiata Group Bhd.

“While demand growth will be negatively impacted by the MCO, the bulk of TNB’s regulated earnings are on a revenue-cap basis. This means that TNB is technically compensated for any shortfall in demand,” Imran says.

IHH could be a beneficiary should the MCO be lifted, he says, as there could be a return of non-urgent and non-essential medical procedures and services as well as a revival of medical tourism — segments that have been practically halted by the MCO.

In Axiata, he sees the potential for higher call frequency and duration as well as increased data consumption during the MCO, which would help to partially support ailing voice revenue and further accelerate data revenue growth.

Post-MCO, Axiata could get more business as companies set up remote working systems for their employees under a “new normal”.

Year to date, TNB has fallen 7.7% to RM12.24 while IHH had lost 4% as at last Thursday’s close of RM5.25. At RM3.94, Axiata’s share price was 4.8% lower. In contrast, Dialog has only seen a 3.5% erosion of its share price, ending last Thursday at RM3.33.

How attractive are their valuations at present?

TNB is trading at a trailing 12-month (T12M) price-earnings ratio of 15.37 times, slightly higher than its 14.22 times 10-year average PER.

IHH is still trading at relatively high valuations, at 83.53 times T12M PER — higher than its 66.44 times 10-year average PER.

At last Thursday’s price, Axiata is trading at 26.46 times T12M PER, which is lower than its 10-year average of 32.34 times.

Dialog’s 30.95 times T12M PER is also slightly lower than its 10-year average of 31.76 times.

Other than these, large caps that have been badly battered, such as Genting Bhd, Genting Malaysia Bhd and Public Bank Bhd, are also good candidates for consideration based on their valuations.

Ivy Ng, head of Malaysia research at CGS-CIMB, says these are the FBM KLCI constituent stocks that the research house has an “add” call on as “we feel the decline in share price more than reflects the potential loss in earnings due to the MCO”.

Areca Capital Sdn Bhd CEO Danny Wong also believes gaming stocks and banks are likely to recover post-MCO. But he is of the view that there are more interesting names beyond the constituent members.

“We are focused on two themes — bashed-down stocks and those that will be in a stronger position in the post-MCO/Covid-19 world, for example, digital/technology trends. These are long structural trends that now look likely to be further accelerated post-Covid-19,” he says. “Our picks are technology stocks and stocks offering deep value.”

Genting was trading at RM4.17 last Thursday, having lost 30.8% of its market value, while its subsidiary, Genting Malaysia, was RM2.37, or 28% lower.

At these prices, Genting is valued at a mere 8.1 times T12M PER while Genting Malaysia is valued at 10.09 times — significantly lower than their 10-year average PER of 18.65 times and 15.85 times respectively.

At last Thursday’s close of RM16.38, Public Bank had lost about 15.9% of its value and is trading at 11.54 times T12M PER, against its 14.57 times mean 10-year PER.

Will oil and gas stocks come into play?

Although the largest petroleum-producing countries have agreed on a production cut, the outlook for the oil and gas market is still based on how the global economy performs post-Covid-19 lockdowns. However, the winding-up of shale producers will help support the price of crude oil.

The equilibrium between oil demand and supply will determine the direction of oil and gas stocks the world over, including in Malaysia. Owing to a significant oversupply, made worse by the coronavirus’ wrecking of economies, oil and gas stocks have crumbled.

Oil and gas integrated technical services provider Dialog had lost a mere 3.5% of its value as at last Thursday, in large part sheltered from the crude price plunge because of its storage facilities.

Other players have been battered far worse. Yinson Holdings Bhd is 20% down year to date to RM5.18, and T7 Global Bhd is 21% lower at 36 sen.

According to MIDF’s Imran, the outlook for the oil and gas sector for 2020 in general is negative as a low oil price environment tends to result in cuts to capital expenditure relating to development and production.

A bright spot in the sector appears to be Dialog.

“In the current low oil price environment, companies like Dialog, that have defensive business segments, are preferred and we believe that Dialog will be able to weather [this] ... environment and emerge with a minimal impact on earnings,” says Imran.

“Due to the oversupply of crude oil currently in the market, storage has become a crucial part of the value chain as the market anticipates a recovery of the oil price post-Covid-19.”

Khoo of UOB Kay Hian says some oil and gas companies should still benefit from Petroliam Nasional Bhd contracts. Petronas has maintained its 2020 domestic capital expenditure plans but its spending is likely to accelerate only when oil prices regain significant momentum, he says.

Despite the gloomy outlook for the sector, Areca Capital’s Wong is confident oil and gas counters will come in for bargain hunting once the MCO is lifted. “2021 will be the year of strong global economic recovery. Long-term investors should look beyond the current situation and take a position on stock weakness now.”