This article first appeared in Capital, The Edge Malaysia Weekly on July 11, 2022 - July 17, 2022

THERE are still investment opportunities in the market and investors need not stay out of the game, fund managers say — notwithstanding poor market sentiment brought on by soaring inflation, interest rate hikes, recession fears and geopolitical tensions.

Analysts advise investors to accumulate stocks gradually to take advantage of share price weakness and to invest with a two- to three-year timeframe in mind.

Even so, investor sentiment is very data-driven. In an uncertain economic environment, the narrative tends to shift constantly, analysts concede, noting the markets’ attempt to digest prospects in the second half and beyond are also blurred by limited forward visibility of business and macroeconomic conditions.

In the interim, local indices continue to slip. Year to date, the benchmark FBM KLCI has dipped 148.84 points or 9.5% to settle at 1,418.69 last Thursday.

The ACE Market’s descent to 4,604 points was steeper, having plunged 60.2% from a 20-month high of 11,570.34 points.

Bursa Malaysia’s Small Cap index fell last Monday below 14,000 points for the first time in over a year and a half . The last time the index fell below 14,000 was on Nov 11, 2020, when it closed at 13,950.24 points.

In a note last Monday, Hong Leong Investment Bank (HLIB) Research analyst Ng Jun Sheng noted expectations for the KLCI to remain “choppy” this month due to a lack of conviction among investors, underpinned by a 24% slide in trading value from May’s RM2.39 billion to June’s RM1.81 billion, amid prevalent headwinds.

Meanwhile, RHB Investment Bank slashed its end-2022 FBM KLCI target to 1,580 points (from 1,670 points) after ascribing a lower 15 times (from 16 times) price earnings to FY2023 earnings per share to reflect the less favourable operating environment, going forward.

Analysts believe that with the economic reopening now fully priced in, the markets’ attempt to digest prospects for 2H2022 and beyond are hampered by limited forward visibility of business and macroeconomic conditions.

Sentiment is expected to remain fragile, given the various external and internal macroeconomic threats, compounded by domestic political and regulatory concerns.

Malacca Securities head of research Loui Low Ley Yee tells The Edge that market sentiment is highly data-driven, with a narrative that changes by the day.

“Just last week, talk was rife that the Federal Open Market Committee (FOMC) should be more hawkish in countering inflation with higher interest rates. However, heightened fears of inflation this week have observers saying the reverse and hoping for interest rate cuts next year.

For more certainty and clarity, soon-to-be-released CPI data and the FOMC meeting later this month should be able to [quell concerns],” Low says.

He believes that a recession, should it be declared, could be a good thing as it could spark a market correction. “Given the many moving parts now and the sharp fall in the first half of the year, it is impossible to time the market. However, this may be a good time to buy in batches and bottom-fish good counters,” says Low.

He points out that the reopening of borders and full resumption of business activities may support economic growth.

“Moreover, with the return of international travellers, we believe the economy should stabilise in the second half of 2022. Based on consensus, Malaysia’s gross domestic product (GDP) could grow by a rate of 6.2% and 4.8% in 2022-23. Note that Bank Negara Malaysia (BNM) projects the growth at 5.3% to 6.3%,” Low says.

“A sound investment strategy is about averaging the investments out rather than trying to ‘catch’ the bottom of a market drop because no one knows when that would be. When the market rebounds, people often regret not investing earlier. Get in, and after a year or two, you will be glad to have bought [the shares] when prices were low,” Phillip Capital chief investment officer Ang Kok Heng suggests.

He likes “recession-proof stocks” such as credit rating services due to the population’s perpetual need for loans, and telcos, on the expectation that the government will continue to increase the usage of 5G.

“Telcos are fairly stable. While the public may fall short of paying electricity bills, it isn’t so with phone bills,”Ang observes.

As for whether investors should hold on to their cash until a better time to enter the market, Areca Capital chief executive officer Danny Wong believes firstly, investors would be safe to hold 30% cash for an active management of their investment portfolio.

“That is to actively look for opportunities to enter the market. Our advice is to buy [equities], a little at a time, over the next six months rather than to jump in now with one lump sum,” Wong adds.

Secondly, Wong suggests undertaking a strategic portfolio which is skewed towards thematic investments such as technology stocks, which have been forecast to do well in the next three to five years, as well as banking and consumer stocks on the basis that “consumption will return in the next three years while inflation would have normalised”.

“In view of the normalising of interest rates and inflation [over the next few years], it wouldn’t make sense to hold low-yield products such as deposits and bonds as they will not hedge well against inflation. Also, bear in mind the possibility of further weakening of the ringgit. We therefore recommend dollar cost averaging as you need to have better returns to hedge against inflation risks,” he advises.

“There are, of course, investors who would rather sell down most of their investments so as to keep cash instead, but I guess this is the wrong time to do that as it is now too late to sell anything unless one undertook a short-term tactical play,” he adds.

In terms of market catalysts, Wong believes there will be better developments in Asia; namely, in its emerging markets compared with advanced economies such as Europe and the US, given the former’s high populations, through which internal consumption can be expected to mitigate downside risks.

“China’s comeback, joining many countries around the world in relaxing their border policies, certainly encourages economic normalisation and I expect the pickup in economic activities to be even more robust than pre-Covid levels,” Wong says.

He expects monetary flows to spill over to Malaysia — and emerging markets in Asia — over the next six months to a year as the nation transitions well into endemicity, encouraging a pickup in consumption levels.

“In addition, as banking rates eventually normalise, the US market will not withstand such rates as they are too aggressive [an economy]. Hence, the US risks a potential recession. Asia, however, has always shown positive gross domestic product growth even during times of crisis. There may be low growth of only one to two per cent, but a three- or five-year recession is rare,” Wong remarks.

These factors will result in the ringgit being more attractive, he said, given that Malaysia’s policies are more moderate. For instance, even when raising interest rates, Bank Negara Malaysia (BNM) opted for a 25 basis-point (bp) increase instead of a two per cent hike.

“As market sentiment is still poor, buy fundamental stocks and strong investment products gradually over the next six months,” Wong advises.

As the nation’s state of endemicity is expected to boost activities within the consumer and services sectors, Malacca Securities’ Low says the aviation, airports, tourism and consumer segments stand to be gainers in 3Q.

His consumer picks are Power Root, given the popularity of the ready-to-drink market as well as the coffee maker’s commitment to factory space expansion and new automation for better efficiency; cocoa manufacturer Guan Chong, for its expansion of production capacity and capitalisation of growing demand for cocoa ingredients on the back of improved chocolate consumption and reopening of international borders; as well as QL Resources Bhd, as the recovery in economic activities is expected to drive demand across QL’s business segments as well as its key expansion plans.

Last Wednesday, BNM raised the overnight policy rate (OPR) by another 25bp to 2.25% — the second 25bp hike year to date.

As economists expect another 25bp hike in OPR before year end, this will potentially make for a total 75bp lift to 2.5% this year.

CGS CIMB Rearch analyst Winson Ng points out that the OPR hike is expected to be positive for banks as their total floating rate loans are larger than their total fixed deposits, both of which would be repriced upward following the OPR hike.

“Every additional 25bp hike would increase our net profit forecasts for banks by an estimated 2.1% (for FY2024F for Hong Leong Bank, AMMB Holdings and Alliance Bank Malaysia, and FY2023F for the rest),” says Ng, whose top sectoral picks are RHB Bank, Hong Leong Bank and Public Bank with target prices of RM7.70, RM23.30 and RM5.07, respectively. He cautions, however, that the interest rate hikes could be negative for banks’ loan growth and asset quality in light of higher borrowing costs and increased monthly loan repayment.

“However, we have factored in a deterioration for the above as reflected in our projected loan growth of 4% to 5% for 2022 from 5% year on year at end-May, and an increase in gross impaired loan ratio from 1.64% at end-May 2022 to 1.8% to 2% at the end of December,” says Ng.

As China eases pandemic restrictions by loosening intercity travel and halving the quarantine period for international arrivals to one week, Low expects an uplift in the transportation and logistics sector.

“Some bright spots from China might spill over to Malaysia. Despite concerns of a recession, shipping demand should persist, especially with the backlog of orders. The shipping industry should generate quantum leap results for the third quarter (3Q),” Low forecasts.

As long as the Russia-Ukraine war is not resolved, he adds, commodity prices will continue to fall (on recession fears).

At the start of the Ukraine crisis, Brent oil went from the US$100 (RM443) level to US$140.

“The risk premium is still in place. We believe Brent price should sustain at its current US$125 level, or at least above the US$97 to US$100 level for now. Players like [integrated O&G services provider] Dayang Enterprise Holdings and Gas Malaysia stand to gain,” Low opines.

Meanwhile, technology companies with strong earnings are also expected to weather the current economic crises.

“In the past 10 to 15 years, there were only a few instances where the technology index fell 40% to 50%. Judging by past performance, technology stocks show stronger earnings today with balance sheets indicating much more robust performances compared with the last two decades. As such, retail investors can position their investments in technology stocks in stages on the premise that earnings will hold,” says Low, noting that the flattish sentiment for technology stocks is due to the interest rate upcycle, which has deterred investors from these growth counters.

Ang points out that although the market faces challenges such as rising US dollar and loan repayments amid fears of an impending recession, investors should be “more rational and calmer in analysing” the circumstances.

“All the market needs is a hint of good news. In fact, oil prices have plunged by 20%. That is positive news. Bear in mind that the market can rebound anytime, especially once the bad news tapers down. Market watchers need not wait for ‘perfect circumstances’,” Ang says.

“Unfortunately many investors have trader’s mentality. The continuous flow of market information causes many to take a short-term view of equities. Remember that you’re investing in the business, therefore, look away from price fluctuations,” stresses Ang.

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