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WITH investors rotating out of Covid-19-related counters that make gloves, personal protective equipment (PPE) and masks, big-cap conventional plays — including banking and gaming stocks — that are components of the FBM KLCI are back in the limelight.

The FBM KLCI ended at 1,597.58 points last Wednesday, up 1.2% from its close a day earlier, buoyed by the overnight record closing on Wall Street amid news that the Trump administration had agreed to start the transition process for President-elect Joe Biden to move into the White House.

FBM KLCI component stocks that saw positive overnight gains included Telekom Malaysia Bhd, which closed up 5.2% to end at RM4.84; Press Metal Aluminium Holdings Bhd, which was up 4.9% to RM6.40; and CIMB Group Holdings Bhd, which rose 3.9% to RM3.78. Interestingly, none of these stocks were among those that enjoyed extraordinary price gains due to the Covid-19 pandemic.

Pankaj C Kumar, a former director of investment at KSK Group Bhd, says the market’s initial reaction can be attributed to the news flow on the more than 90% effectiveness of the vaccine jointly developed by Pfizer Inc and BioNTech SE, as well as the Moderna vaccine.

“Investors viewed this development as a solution to the Covid-19 pandemic, hence the shift from cyclical stocks to growth and value stocks. That’s where we saw a rally in banking stocks, some consumer stocks as well as gaming stocks on the expectation that things will go back to normal in 2021,” he tells The Edge.

Pankaj: The market is still very much sensitive to news on the vaccine (Photo by Mohd Izwan Mohd Nazam/The Edge)

“You can see that the market is pricing in this big rotational move [on the expectation] that we have found a solution for Covid-19. But whether that is going to be the end game, we don’t know yet, as it is too early to tell since there have been issues related to the production, distribution and pricing of those vaccines. The market is still very sensitive to news on the vaccine — be it positive or negative news flow.”

With the positive sentiment following the vaccine news, the market is looking forward to recovery plays on some conventional businesses, says Areca Capital Sdn Bhd CEO Danny Wong Teck Meng.

One of these is banking. “Some of the banking stocks are now trading below their book value. So, these are the kinds of things that investors may want to look at as a recovery play, not so much for their earnings [potential] but their net worth; in short, their price-to-book ratios,” he tells The Edge.

Pankaj concurs. “[Some of the] bank stocks definitely look cheap when you look at the historical measurements on a price-to-book basis. However, that is on the assumption that they will remain attractive despite the challenges next year as we are just coming out of the moratorium period,” he says.

Wong: The market is looking forward to recovery plays on some conventional businesses (Photo by Shahrin Yahya/The Edge)

“The expectation of an increase in the number of non-performing loans next year may not materialise as there is still no evidence to suggest that loan defaults will rise, and this perhaps has spurred the rally in banking stocks, and not just the news flow on the vaccines.”

A check on the book value of Malaysian banking stocks as at last Wednesday showed that companies such as CIMB Group, RHB Bank Bhd, AMMB Holdings Bhd, Alliance Bank Malaysia Bhd and Affin Bank Bhd were all trading below their book value.

On whether the rotational play seen this year could be taking a “breather”, offering investors an opportunity to load up on big-cap component stocks, TA Investment Management chief investment officer Choo Swee Kee points out that markets and stocks in general do not go up in a straight line — in fact, the trend line is always wavy.

“If you are buying into a trend, for example, the recovery trend of the economy, there will be pockets of consolidation where you can pick up these affected stocks at better prices. We feel that it is more important to identify the trend early and project how far it will go, rather than worry about an interim breather or corrections,” he says.

Choo: There are still profit opportunities in glove stocks if and when they are sold down (Photo by Patrick Goh/The Edge)

Since Nov 2, a number of FBM KLCI component stocks including Genting Bhd, CIMB Group and Public Bank Bhd have been on an upward trend.

In a note last Monday, CGS-CIMB Research said fund flows from Nov 16 to 20 showed that local institutional investors had raised their net exposure to Malaysian banks and Genting, with a net buy of RM215.4 million for Public Bank, RM119.6 million for CIMB and RM127.5 million for Genting.

Genting shares had appreciated 36.9% from RM2.98 on Nov 2 to close at RM4.08 last Wednesday. On a year-to-date basis, however, its share price is still down 28.7%. Meanwhile, Public Bank saw a month-to-date gain of 26.8% to close at RM18.92 last Wednesday while CIMB shares were up 30.3% to RM3.78 in the same period.

Is there still upside for Covid-19-related counters?

TA’s Choo says it may be too early to write off Covid-19 beneficiaries such as the glove makers and companies that have announced they are going into PPE ventures. “This is for the simple reason that Covid-19 is still rampant in the world and the rollout of vaccines to counter the spread takes time and may be more complicated than expected.

“The demand for gloves, masks and PPE is still strong and expected to remain so for the next 12 to 18 months. Hence, we feel there are still profit opportunities in glove stocks if and when they are sold down.”

Pankaj says there will still be demand for PPE such as gloves even with the discovery of Covid-19 vaccines. However, it is too early to tell whether all the companies that have announced their ventures or diversification into PPE will stay in the race, he adds.

“The demand for gloves will still be there as nobody is going to carry out a vaccination without protecting themselves by wearing gloves. [As for the newcomers,] in any cyclical move, you will always see opportunists coming into the market to enjoy the extraordinary margins being gained by the incumbents,” says Pankaj.

“But only time will tell whether these people can really deliver and their ventures will prove fruitful. Do they have the know-how or expertise in the market? It is also a function of demand and supply as Malaysia is not the only country producing gloves. And don’t forget, the big four glove makers are also ramping up production.”

The share prices of FBM KLCI-component glove makers Top Glove Corp Bhd and Hartalega Holdings Bhd have been on a decline since news of the Pfizer and Moderna vaccines broke. Top Glove shares had fallen 20.7% month to date to close at RM6.65 last Wednesday, while Hartalega shares had slipped 19.5% to RM14.36. Top Glove’s selldown was further fuelled by news of a temporary shutdown of its factories in Klang owing to the Covid-19 outbreak in its worker dormitories.

Non-FBM KLCI component glove stocks also fell. Kossan Rubber Industries Bhd saw a 17% month-to-date plunge to RM6.03 last Wednesday, as did Supermax Corp Bhd, whose shares fell 9.3% month to date to RM8.08.

http://www.theedgemarkets.com/article/seeking-opportunities-recovery-theme

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