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IN Malaysia, the Covid-19 outbreak has brought about a stock market rally led by glove makers and companies manufacturing personal protective equipment. But with Russia claiming last week to have developed the world’s first Covid-19 vaccine, has a spanner been thrown in the works of the pandemic-driven rally of the past few months?

The march of the glove counters was momentarily halted, but according to some analysts, the rally still has legs.

Here, we take a look at the counters that have been on the rise since mid-March when the Movement Control Order was put in place. We also ask fund managers for their views on the next best sectors to watch out for once the dust settles.
Stocks driving the indices

The benchmark FBM KLCI dipped to an 11-year low of 1,219.72 points on March 19 but took a turn for the better from that point, even crossing the 1,600 level towards the end of July. Last Thursday, the benchmark index closed at 1,576.42 points for a 29% gain compared to its March 19 close.

Top Glove Corp Bhd and Hartalega Holdings Bhd have fuelled the FBM KLCI gains over the past five months because of the increase in demand for gloves amid the Covid-19 pandemic.

Top Glove’s share price soared by 330% to RM25 last Thursday, from RM5.81 at the March 19 close, while Hartalega shares were up 162% to RM16.56 over the same period.

This also had a positive spillover effect on mid- and small-cap companies, with the FBM Mid 70 index — comprising the 70 companies on the FBM EMAS index by full market capitalisation — appreciating by 57% since March 19 to close at 14,401.55 points last Thursday.

Not surprisingly, the stocks that led the Mid 70 index pack were glove makers Supermax Corp Bhd — RM19.48 as at last Thursday from RM1.46 on March 19 — and Kossan Rubber Industries Bhd, which rose 232% to RM15.10.

Record-breaking trading volumes helped to prop up the share price of exchange operator Bursa Malaysia Bhd, which has more than doubled since March to RM9.57 at present.

As for small-cap companies, the FBM Small Cap index has appreciated by 74% to close at 13,362.97 points, driven by glove maker Comfort Gloves Bhd as well as technology counters Globetronics Technology Bhd and UWC Bhd.

Since March, Comfort Gloves shares have skyrocketed by 579% to RM4.20, Globetronics by 108% to RM2.78 and UWC by 320% to RM4.62.
How long will this rally last?

The answer to that question, according to fund managers, is another question, which is how fast can a vaccine be developed and commercialised?

“From what I have read, it is not going to be easy to have a vaccine ready anytime soon as it needs evidence of success and tests on humans before it can be declared as a vaccine. It will also take time to roll out commercially and when it is readily available, I am sure the first target group will be the high-risk group — the elderly and frontliners.

“Judging by this scenario, it will be a while before we put Covid-19 behind us and hence, companies involved in this space can expect strong demand for their healthcare products,” says Pankaj C Kumar, a former director of investment at KSK Group Bhd.

Nevertheless, he cautions that the valuations of some of these companies — fundamentals aside — already reflect a blue-sky scenario and very high profit margins enjoyed by the incumbents.

“It is no surprise that everyone else wants to be a glove or face mask producer. At the end, these products are actually commodity-like products. A surge in demand will see supplies quickly coming in to enjoy the super price margins and before you know it, margins will collapse.

“It is not easy to put a time frame on the Covid-19 rally as I believe it is not just Malaysian companies that are able to match the surge in demand for healthcare products,” Pankaj cautions.

TA Investment Management chief investment officer Choo Swee Kee concurs. “We cannot say how long the interest in Covid-19 [related stocks] will last [because] there are various waves to this pandemic, with a [possible] second or maybe third wave. Healthcare-related stocks will still be very much in the limelight in the short term, but their share prices are more volatile at these high levels.”

Private investor and former investment banker Ian Yoong believes that the six-month rubber glove rally is past its midpoint.

“It will be over when Russia starts vaccinating its citizens or when more vaccines are announced. I will watch for insider selling by rubber glove manufacturers. There has been little significant insider selling thus far.

“Insider selling will be triggered by a downward trend in spot pricing of nitrile gloves. Information on spot pricing and average selling price is not freely available [to all investors], and it is difficult to conduct channel checks. This information is made known to analysts and fund managers by glove manufacturers. Hence, the information dissemination process is not efficient,” he observes.

Trading volume on Bursa Malaysia hit an astounding new record of 27.8 billion shares last Tuesday — the result of unrelenting buying, especially by retail investors, according to Rakuten Trade head of research Kenny Yee.

“The upward trend was initiated by exuberance in the glove sector, [which] cascaded down to the Covid-19-related segments. The emergence of retailers is due to the low interest regime.

“Looking at year-to-date fund inflows, the retail portion is almost on a par with the domestic institutions of RM11 billion. Hence, the persistent foreign outflow seems to have very little impact on the market,” Yee says.

TA’s Choo says both institutional and retail investors are driving the market rally, but the latter has proved to be more aggressive. “Institutional investors are mostly focused on the existing glove producers due to [their] earnings growth and liquidity. Retail investors are happily trading in both existing glove producers and other Covid-19-related start-ups.

“Most retail investors have been away from the market for a while and the sharp fall in the market in March may have triggered them to return in a big way. Seasoned investors always have this saying that the best time to buy is when there is a big crash in the market. I would say that the loan moratorium and the free time people have, being at home, may have played a small part in the initial stage,” he adds.

Yoong says that high frequency traders and proprietary traders were churning, resulting in large trading volumes. “High volume is like loud rock music that drives people into a frenzy at a party. Credit [goes] to the Securities Commission Malaysia and Bursa Malaysia for the suspension of short-selling [activities].”

According to Pankaj, the retail interest phenomena in the stock market is not only happening in Malaysia but is seen the world over.

“In the era of low interest rates and with government handouts as well as the six-month moratorium period, retailers seem to have a reason to be in the market. With the right cyclical interest in the market, driven by interest among healthcare stocks and glove makers, retail investors have indeed found it to be easy-going in making a quick buck as momentum and liquidity factors are very strong.”
Next rotational play

The logical rotation after healthcare stocks would be the sectors that recover after being hit hard by the pandemic, such as tourism, including airlines, airports and hotels, says TA’s Choo.

“Basic consumer goods such as shoes, shirts and toys, and leisure activities such as shopping and simple dining would also see recovery. However, the recovery would be more gradual and the pace would also depend on the strength of the Malaysian economy,” he says.

Yoong believes that Covid-19 and the impact of social distancing have become the ultimate disruptor for the technology sector.

“It is accelerating investment in digitisation and the digitalisation process in almost every facet of our lives. US e-commerce penetration achieved the equivalent of 10 years’ growth in the first three months of 2020. Nothing is more powerful than an idea whose time has come. We must identify and invest in listed companies that benefit from this transformation.

“My short-term trading focus is on small-cap companies with market capitalisation of RM500 million and less, and a share price of less than RM1. There is a higher possibility of a stock moving from 50 sen to RM1 than for a stock to move from RM5 to RM10 in a time frame of two to four weeks,” he says.

Yoong believes that a sector that could outperform in the second half of this year is oil and gas. “Brent crude at US$45 per barrel has found a base and should inch up towards the end of the year. A couple of large shale producers have been badly impacted and Organization of the Petroleum Exporting Countries members have managed to work together.”

If market liquidity remains strong, Pankaj believes that there will be rotational interest in other sectors, including tech, jewellery, oil and gas, and plantation. “What is more important is the earnings delivery of our corporates and that is the true test of if fundamentals can justify where stocks are trading.”

http://www.theedgemarkets.com/article/capital-covid19-rally-and-beyond
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