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Investors seen swapping pandemic plays for recovery proxies

KUALA LUMPUR (Nov 17): As soon as news broke early this month of the positive progress seen by Pfizer in the discovery of a Covid-19 vaccine, there has been a marked rally in stocks that were previously badly hit by the pandemic outbreak, including those in the battered travel and hospitality sector.

This rally led to companies on Bursa Malaysia gaining a total market capitalisation of RM134.64 billion since the start of this month, despite the heavy selldown seen in glove counters.

The FBM KLCI is moving ahead as the market is anticipating a sooner-than-expected availability of the vaccine, analysts told The Edge.

Still, according to Bloomberg data, among the 30 component stocks on the KLCI and 15 other selected stocks related to the aviation, brewery, number forecast operator, and real estate investment trust (REIT) sectors, 31 of them have market capitalisation that are below their five-year average.

In contrast to their 10-year average market cap, 24 out of the 45 counters are still undervalued, led by low-cost airline AirAsia Group Bhd and its long-haul arm AirAsia X Bhd, which are down 77% and 65.6%, respectively.

This is followed by Sime Darby Bhd (-59.3%), Hektar REIT (-51.3%), CapitaLand Malaysia Mall Trust (-50.4%) and Genting Bhd (-47.3%) as well as Genting Malaysia Bhd (-35.7%).

Interestingly, apart from CIMB Group Holdings Bhd, which has fallen 26.3%, the other four index-linked banking stocks are still valued higher than their respective 10-year average market cap, namely Hong Leong Bank Bhd, which is up 26%, followed by RHB Bank Bhd (5%), Malayan Bank Bhd (1.72%) and Public Bank Bhd (0.37%).

TA Investment Management chief investment officer Choo Swee Kee said “it is about time for investors to pick up oversold recovery stocks”, saying their valuations are attractive.

“This would include stocks in tourism (airports, airlines and hotels), retail and consumer space. Banks will benefit from the recovery in consumer credit, and indirectly, material, as hard commodities and energy such oil and gas would also see a recovery in demand,” he said. “A lot of good stocks were unfortunately affected by this unprecedented event and were sold down due to the short-term prospect,” Choo added.

“If the Covid-19 shackle on the market is removed, there may be pent-up buying of investment assets for future returns,” said Choo, adding the condition is right for the benchmark FBM KLCI to rally for the next six months, amid abundant liquidity in the market while interest rate levels remain low.

Nonetheless, he advised investors to have a longer-term view rather than hyping the short-term, adding that economic activities have to resume sooner or later.

Rakuten Trade Sdn Bhd's research head Kenny Yee concurred that it is time for investors to shift their focus to bashed-down stocks, and said banks may be the first to recover as they are seen closely connected with the economy, as money slips out of the glove segment and into stocks seen as recovery proxies.

However, he also cautioned that the vaccine "will not come so soon". "Nothing is concrete yet, so it is all sentiment driven. What we are seeing now is the positive knee-jerk reaction. Of course, we are edging closer to vaccines. They should be available anytime next year, and the stock market reacts ahead of the cycle,” said Yee.

Similarly, Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng raised concerns about the availability of the vaccine, as well as the resurgence in Covid-19 infections in countries that have yet to be able to bring it under control.

“The problem with Pfizer's vaccine is the freezer, which is not the most ideal, according to the WHO (World Health Organization),” Ang said, noting many countries will not have the needed ultra-low temperature freezer to store Pfizer’s vaccine -- which is needed to be kept at minus 70 degree Celsius. The supply and production for this kind of freezers to transport the vaccines may also be limited, he added.

“The price will be exorbitant and could cost as much as the vaccine itself. And once the Covid-19 is over, what are you going to do with the freezer? It is not an investment anymore, but an apparatus to be chucked away,” Ang added.

As to whether investors should shift towards the battered cyclical stocks, Ang said: “Different people have different strategies, and whether investors are buying for the short-, medium- or long-term.”

MIDF Research head of research Imran Yassin Md Yusof, meanwhile, thinks it is still “too early to be solely focussed on the recovery play at the moment”, given the prevalent downside risk. “Our concern for banks at the moment is on its asset quality post-loan moratorium, and we believe it will take some time for the aviation industry to recover, even with a vaccine,” said Imran.

Investors, he stressed, also have to bear in mind that the vaccine from the Pfizer and BioNTech partnership has yet to receive final approval for wide-scale use.

Even if it gets that final nod, it will take some time before it could be available to the general public, said Imran, who expects that to happen only in the third quarter of 2021, at the earliest. In the mean time, Imran too thinks that the logistics and storage of the vaccine remains a question.

Nonetheless, he said there are fundamentally strong companies which are considered cyclicals that investors could accumulate. As example, he cited banks with strong asset quality and stable borrowers profile.

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