MUCH has been said about the disconnect between the stock market and the economy this year. Local equities have been on the rise since the massive sell-off in March. Many were convinced that the current liquidity-driven rally would not last, but it has proved to be sustainable thus far this year with global stock markets surging to record highs.

Generally, the stock market moves six months ahead of the economy but some claim that it could be 12 months ahead now, judging by the continued rise in the equity market.

The local bourse has been defying a shrinking economy on the back of ample market liquidity, a blanket loan moratorium and a low interest rate environment.

After seeing a slump in mid-March — as Covid-19 infection numbers rose, coupled with the oil price rout — the FBM KLCI regained lost ground within a short period of time, rebounding more than 20% in May from its low of 1,219.72 points in March.

Undeterred by wild swings in the market, more retail investors, particularly the millennials, dipped a toe in the equity market when the movement restrictions were enforced in March to stem the spread of Covid-19. The bull market was fuelled by retail investors who had extra funds as a result of the six-month loan moratorium, as well as more time to monitor market movements because of the working-from-home model.

These catalysts led to many stocks — especially those that announced ventures into the manufacture of gloves, test kits, personal protective equipment (PPE), vaccines and ventilators — rallying to stratospheric levels.

At the same, glove counters soared to their record highs, underpinned by strong demand for gloves and rising selling prices.

On the flip side, the Malaysian economy saw its worst year-on-year contraction of 17.1% in the second quarter of the year, making it the worst-performing economy in Asean. In 3Q, the GDP shrank only 2.7% as it reflected the impact of the reopening of the economy after the easing of the Movement Control Order and better external demand conditions.

Full-year GDP contraction is forecast to be 3.5% to 5.5%, before rebounding to a growth of 6.5% to 7.5% in 2021.

ACE Market aces

Taking its cue from the rally in US stocks, the FBM KLCI closed at a 17-month high of 1,684.58 points on Dec 11, supported by heavyweight banking stocks as the market shifted from a pandemic theme to being recovery-focused.

However, the key benchmark index retreated to 1,652.49 points on Dec 18. The market capitalisation of the local bourse stood at RM1.829 trillion on the same day, up 4.3% from RM1.753 trillion on Dec 31, 2019.

Companies listed on the ACE Market have been the biggest winners this year with a 100% gain in the FBM ACE Index, against the 4.01% rise in the benchmark FBM KLCI. The FBM Small Cap Index has also increased 8.23%, higher than the FBM Emas Index’s 5.01% and FBM 100 Index’s 4.82%.

Sector-wise, however, most have registered negative returns year to date, except for healthcare (+196.08%), technology (+79.03%), industrial products and services (+14.53%), and transportation and logistics (+1.26%).

The energy sector has seen the biggest decline of 26.82%, though global oil prices have been recovering since the oil rout early this year. Other hard-hit sectors are property (-10.82%), REITs (-11.01%) and consumer products and services (-7.12%).

Retail participation intensified in August, propelling trading volume on Bursa Malaysia to an all-time high of 27.8 billion shares on Aug 11 — mostly from penny stock transactions.

Active trade was also seen in structured warrants as investors took advantage of the positive market sentiment. Trading volume spiked to a high of 17.38 billion units in July, against a monthly average of five billion to eight billion units before the pandemic, according to Bursa statistics.

In November, structured warrants gained traction again as trading volume soared to 17.23 billion, but with a much lower trading value of RM3.17 billion versus RM6.67 billion in July.

New records set

This year has been one of new records for the local bourse. For one, countless unusual market activity (UMA) queries were issued because of sudden spikes in trading volume and share prices.

Another record is the number of stocks hitting limit up, following news of companies venturing into the healthcare sector, including gloves, PPE, test kits and ventilators. For the week ended Aug 7 alone, more than 20 stocks hit their upper limits — a scenario not seen for years.

Due to the excessive valuation in certain stocks, analysts cautioned about the risk of asset bubbles, as stock prices may not be reflective of the underlying fundamentals.

But this did not seem to worry retail investors, who were seeking high investment returns after the cuts in the overnight policy rate (OPR) to a record low of 1.75%. Their active participation of over 40% gave a strong boost to the market when foreign funds were the net sellers of local equities.

Besides healthcare stocks, jewellery stocks also joined the party in July and August, thanks to the surge in the price of gold arising from uncertainties over the global economic recovery. Tomei Consolidated Bhd and Poh Kong Holdings Bhd jumped to their multi-year highs after gold price shot up to over US$2,000 per ounce.

Stepping into the second half of 2020, various public vaccine deals were signed between local players and vaccine developers to reap the benefits from vaccine distribution, leading to the emergence of the vaccine theme.

Pharmaceutical stocks such as Pharmaniaga Bhd and Duopharma Biotech Bhd swiftly drew investors’ interest after they were tasked with undertaking the fill and finish processes for the Covid-19 vaccine.

After profit-taking in September, market interest in healthcare stocks, particularly glove stocks, returned in October, as health director-general Tan Sri Dr Noor Hisham Abdullah warned that Malaysia could see a third wave of the Covid-19 pandemic as infections surged globally.

It is worth noting that a suspension of short-selling activities took effect on March 24 to mitigate potential risks arising from heightened volatility and global uncertainties. The suspension was initially targeted to end on April 30 but it was extended twice to June 30 and, subsequently, Dec 31.

Bursa and the Securities Commission Malaysia have announced that the suspension of regulated short-selling will be lifted on Jan 1, 2021. However, the ban on intraday short-selling and intraday short-selling by proprietary day traders will be extended until Feb 28, 2021.

Recovery theme

Banking stocks have seen some of their strongest gains in recent years. Notably, Malayan Banking Bhd — the largest stock on Bursa by market capitalisation — touched an intraday high of RM9.01 on Dec 14, the highest in the past 15 months.

With the recovery theme picking momentum, the share prices of Genting Bhd and Genting Malaysia Bhd have risen 59.8% and 43.5% respectively from their lows in March. During the same period, AirAsia Group Bhd, AirAsia X Bhd and Malaysia Airports Holdings Bhd (MAHB) were up 70.2%, 100% and 42% respectively.

There were no significant changes to the FBM KLCI constituents in 2020. Telekom Malaysia Bhd and KLCC Stapled Group were named as the component stocks of Bursa in June, replacing AMMB Holdings Bhd and MAHB, following the bi-annual review of the index series.

Meanwhile, the recent review saw Supermax Corp Bhd replacing KLCC Stapled Group.

Moving into 2021, the key risk for the stock market is the 15th general election, with some expecting it to be held in the second half of the year when the pandemic subsides. Prime Minister Tan Sri Muhyiddin Yassin has indicated that a general election will be called when Covid-19 comes under control.

Overall, analysts believe the active trade on Bursa will continue through the first half of 2021. This will be partly supported by expectations that Bank Negara Malaysia will keep the OPR at 1.75% throughout 2021.

Despite the end of the automatic loan moratorium, retail participation remained robust, with the October-to-December average at 39.8% versus September’s 38.3%, according to HLIB Research.

For now, HLIB Research is the most optimistic research house, expecting the FBM KLCI to end 2021 at 1,780 points on “recovery premium”, while MIDF Research and AmResearch have targets of 1,700 and 1,770 points respectively.

“Investors will continue to accumulate recovery plays, namely fundamentally strong names in the banking, power, oil and gas, consumer, REIT and transport sectors, while lightening their positions in pandemic plays, namely glove makers and selected excessively priced technology names,” AmResearch notes.

With foreign shareholding near the global financial crisis’ trough of 20.8%, HLIB Research believes the base now appears palatable to envision foreign investors’ re-entry given the “risk-on” mode.