Cautious mode ahead of Budget 2022
AT the three-quarter mark this year, half of the sectors on the FBM KLCI have turned in negative returns, underscoring the tepid performance of the benchmark index that has lagged its regional peers. In the third quarter, the index saw a small gain of 0.3%, while its year to date (YTD) decline was 5.5%.
The Healthcare Index has suffered the biggest loss on persistent selling in glove makers, and is 28.7% down YTD compared with the Technology Index — the star performer — which has chalked up gains of 35.9% over the same period.
For investors looking to new catalysts apart from the recovery themes, the unveiling of the 12th Malaysia Plan (12MP) last week, which sets out the direction for the country over the next five years, did not excite.
Analysts believe the tabling of Budget 2022 in parliament on Oct 29 will have a greater impact on market sentiment. It will also be the last hurrah of sorts for the index, as it is the final quarter of the year.
Overall, Kenanga Research head Koh Huat Soon sees some upside to the local bourse, supported mainly by the rally in commodity prices, particularly crude oil and crude palm oil (CPO).
Brent oil touched a three-year high of more than US$80 a barrel last week on energy undersupply concerns.
“The US$80 level is very encouraging, leading to more drilling activity in the oil and gas (O&G) sector. Because of high oil prices and relaxation of lockdowns, O&G service providers can fully operate,” Koh tells The Edge.
CPO — the other golden oil — is the other factor driving earnings growth, given its lofty heights of RM4,000 per tonne, adds Koh, who nonetheless is “neutral” on the plantation sector, as he anticipates that prices will slide.
Turning to immediate headwinds for the market, he points to rising bond yields, which will result in higher cost of capital and which, in turn, will have a dampening effect on valuations.
Corporate earnings growth could mitigate the dampening effect, Koh says. “Corporates have been operating below capacity because of the restrictions as a result of lockdowns. As the economy reopens, they will be more able to fully operate, and it will translate into higher earnings. So, we still expect earnings growth in 2022, albeit in single digits.”
Although corporate earnings should see improvement in 4Q, Inter-Pacific Securities head of research Victor Wan expects the pace to accelerate in the first half of 2022 on the back of a further reopening of the economy.
“Generally, investors are more cautious in October because of the ‘October effect’. We need some catalysts to kick-start the market, which we haven’t seen yet. We don’t know if there are catalysts from Budget 2022.”
The ‘October effect’ stems from the belief that share prices tend to fall during the month. It is more of a psychological expectation since, historically, some large market crashes had occurred in October.
Although the FBM KLCI may look attractive at this juncture, Wan explains that valuations would just have been fair had the two glove makers — Top Glove Corp Bhd and Hartalega Holdings Bhd — been excluded. Both counters were down by 30.9% and 16.3% respectively in 3Q.
JF Apex Research head Lee Chung Cheng believes market sentiment will stay cautious ahead of Budget 2022 because of the possibility of new taxes, such as a capital gains tax on shares. “So, we expect the market to move sideways for now.”
Finance Minister Tengku Datuk Seri Zafrul Aziz last Thursday clarified that the government had no plans to impose a windfall profit levy on rubber glove products as well as other companies that have generated extraordinary profits during the Covid-19 pandemic.
Externally, Lee expects US tapering to weigh on market sentiment. He projects the FBM KLCI ending the year at 1,530 points, which suggests a downside of 0.5% against last Thursday’s close of 1,537.80 points.
“We think the index will end the year around the current level, unless foreign funds come back significantly. Recently, foreign buying has softened, so probably the net foreign inflows were just due to portfolio reshuffling and it may not be sustainable. The local bourse is still driven by retail investors and local institutions.”
Foreign investors remained net buyers for the week ended Sept 24, although the net inflow was a paltry RM15.85 million compared with RM125.97 million in the prior week. Foreign investors remain overwhelmingly net sellers to the tune of RM3.64 billion YTD.
However, Wan is more positive about foreign fund flows, as he expects the local bourse to draw more foreign interest.
Malacca Securities head of research Loui Low believes the change in government will lift foreign investor confidence in the Malaysian market.
While profit-taking activities emerged in technology stocks last week, analysts believe the sector will remain on a strong footing.
“Earnings of technology stocks may come off from the high base, but they remain intact. In the interest rate hike environment, investors tend to go for value and cyclical plays and take profit from growth plays such as technology. We are positive on the technology sector and we see buying opportunities during this period,” says Koh.
Lee concurs, saying that investors could buy on weakness if there is a correction in technology stocks. “The current valuations in technology stocks look pricey, so investors sell on strength. Technology stocks are sensitive to rate hikes and QE (quantitative easing) tapering.”
Low thinks the current sell-off in technology stocks may be temporary and should recover on the back of strong demand for technology.
All eyes on catalysts from Budget 2022
Analysts attribute the muted response to 12MP to factors such as execution risk and fear of new taxes to fund future development.
“The targets under the plan are ambitious and sound good. But do we have the financial capability to implement them in view of the RM400 billion development expenditure over the next five years?” Koh asks.
Wan agrees, noting concerns over the introduction of new taxes to fund future development. “While the government can introduce all sorts of measures, funding is the key. Also, there is the question of new taxes, so the market is a bit cautious at this point.”
Principal Asset Management Bhd CEO Munirah Khairuddin also raises concerns about the sustainability of government funding, which given its parlous finances would require the private sector to evolve and adopt more digitisation.
“It is not just about e-wallet or e-commerce, but from healthcare to transport and telecommunications. The government is doing the right thing by emphasising the development of 5G, digital economy and ESG (environmental, social and governance), but fiscal spending by the government is not sustainable. How long can we continue with this? So, the private sector needs to kick-start themselves and we need broader and better performance across all sectors.”
Otherwise, Munirah says, the return of foreign funds will benefit only big-cap stocks.
“Foreign funds are looking at stability in policies in the short term. If we continue to take advantage of the recovery with value added to our industries, I think real capital foreign direct investment flows will stay and increase,” she says, adding that there is a need for new policies that encourage the development of the digital economy and digital transformation.
With 12MP aiming to narrow the gap between the states, Low anticipates more construction projects.
Koh thinks Budget 2022 will be an extension of the 12MP, with a focus on small and medium enterprises (SMEs) and the people. To achieve high-income nation status by 2025, it is crucial to introduce incentives for high-value investments as well as training to upskill the labour force for better productivity, he stresses.
Low is hopeful the coming budget will provide a boost to the stock market, in tandem with the transition of Covid-19 from pandemic to endemic by October.
“The fourth quarter should perform much better than the first nine months. A lot of people will focus on window dressing. Cyclically, the FBM KLCI is positive during this period. We expect domestic-driven catalysts to lift the market, such as Budget 2022 and businesses returning to normalcy by next year.
“The rise in oil prices will also provide a support to the market. Stocks like Petronas Chemicals Group Bhd and Dialog Group Bhd can push the FBM KLCI higher,” he opines.
Low adds that sectors such as construction, property, telecom and renewable energy could be beneficiaries of Budget 2022.
What to buy in 4Q?
Wan says that, riding the “reopening” of the economy, companies poised to recover include those from the construction, telecom, services and aviation sectors.
Apart from construction, Lee favours other reopening laggards in the consumer, manufacturing, property and O&G sectors.
As December is typically the best-performing month for Bursa Malaysia, Low recommends buying on weakness, saying, “Sector-wise, building materials, telecom, construction and selected tech counters will perform well.”
Stock-wise, both Wan and Low recommend Kelington Group Bhd, a proxy to the semiconductor sector, as it provides ultra-high purity (UHP) gas delivery solutions to the electronics and semiconductor players. Semiconductor companies fabricating wafers and chips need to operate in an ultra-clean environment, as dust and particles can short-circuit the integrated circuits.
Recently, Kelington secured a new contract worth about RM420 million to refurbish an existing facility as well as construct a new facility for a manufacturing company owned by a world-leading data storage devices and solutions specialist. The contract win pumped up Kelington’s new orders secured so far in 2021 to a record-breaking high of about RM764 million, up 56% from its record of RM490 million contract wins for the full year of 2020.
The contract win has boosted Kelington’s share price by 27% in the past two weeks.
For the first half of the year, its net profit nearly tripled to RM12.9 million from RM4.68 million a year ago.
Low also recommends Jaks Resources Bhd, which has successfully repositioned itself as one of the major players in the power plant industry following the commencement of its 25-year build-operate-transfer 2x600mw coal-fired power plant project in Hai Duong, northern Vietnam. It notes that the mid-teens internal rate of return and positive cash flow will be key drivers for the company’s turnaround prospects.
For the first half ended June 30, Jaks reported a net profit of RM48.52 million against a net loss of RM4.06 million in the same period last year.
Optimax Holdings Bhd, an eye specialist, is expected to ride the recovery play because many people were unable to undergo surgery during the lockdown, says Low.
Listed on the ACE Market in August 2020, the stock has jumped fivefold to close at RM1.47 last Thursday from its initial public offering price of 30 sen.
Its net profit surged threefold to RM3.13 million for the first six months of 2021, from RM969,000 in the same period a year ago.
Meanwhile, Munirah prefers the financial services sector as well as cyclical themes such as consumer discretionary, basic materials and transport.
However, she does not have a strong view of commodities, with the supply and demand dynamics still being closely monitored. “Commodities have been volatile and their valuations are not so great at the moment.”
Minimal impact seen from US tapering
On the external front, the major upcoming event would be the US tapering. But analysts are not overly concerned about its impact on the local market as it has been widely expected.
The US Federal Reserve has indicated that it is likely to begin reducing its monthly bond purchases as soon as November and signalled that interest rate increases may follow more quickly than expected.
“Lower volatility or downside risk is expected from US tapering. Right now, everyone is looking for recovery from within the local market,” says Low.
Another key risk to watch out for is the development of Covid-19 when the winter season begins. This is because a resurgence of cases may again delay the global reopening, although all countries have been ramping up vaccination.
http://www.theedgemarkets.com/article/cautious-mode-ahead-budget-2022
