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At current valuations, many names are starting to look stretched and should be re-evaluated. I am starting to see shift from large-cap growth companies to the more value-oriented names, which have largely lagged during this aggressive recovery since bottoming in March. I do believe many of the tech and glove & healthcare-related names are largely overheated and looking quite frothy, primarily driven by retail & algo investors. Retail & algo traders have poured into the market, which has helped fuel the rally we have seen as it almost seems like no news can derail this train. I also see that every Tom, Dick and Harry has led to every person you run into these days providing stock tips, which is a dangerous set up.

Hedge funds that I talked to, seem to be expecting that global stock market is going to begin to decline once again and have already begun to position themselves for such a fall as they believe Fed will not continue to dominate the future. Vast amounts of companies have already pulled guidance. The market is looking increasingly expensive as compared to historical levels, and if the denominator is shrinking while the numerator is increasing (P/E), at some level, there is going to be a correction.

Historically, the autumn months have been especially dangerous for the stock market especially if there are signs that President Trump failed in his re-election in November 2020 election and risk of a resurgence of the Covid-19 pandemic, causing potentially devastating health and economic effects as we enter the cooler weather days of September and October, there are conflicting thoughts as to the likelihood of the virus returning. As China battles an outbreak in Beijing, the United States has seen the number of daily new cases rise in 18 states across the South, West and Midwest. Seven states hit single-day case records on Saturday, and five others hit records. Apple is shutting stores again and the fear of infection is hurting the economy more than lockdowns. People will remain hyperconscious of what they touch. President Trump has recently been losing ground in some of the larger polling venues that are viewed as important to gauging the political landscape.

Local political turbulence remains a key concern given the razor thin majority held by the ruling coalition government. Rejection for government bills when the Parliament convenes from 13 July to 27 August remains quite a good likelihood. Horse trading will increase uncertainty about Malaysia’s political future. Reform agenda is clearly taking a backseat. Meanwhile, Sarawak is gearing up for a snap election with the ruling Gabungan Parti Sarawak (GPS) coalition considering the dissolution of the state assembly.

Value investing is about finding diamonds in the rough that businesses trading at a share price that is considered a bargain. Value stocks have more limited upside potential and can be safer investments than growth stocks. They are typically never quite as bad as the market anticipates. This is my liking where market growth is not broad-based, general corporate earnings are dull and should have downside protection especially those contract manufacturers, insurance-related, mid-end property developers, selected plantation companies, mass market oriented businesses and most importantly, listed shares that are trading at single-digit price-earnings ratios (PERs) with good track of dividend pay-outs.

Chee Seng, Wong
CIO, Athena Advisors

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