iFAST Research Team
AS we approach the half-year mark, the markets so far are reminiscent that volatility will always be present in investments. The concern on excessive inflation and a rising interest rate seemingly around the next corner takes away much of the shine in riskier assets.
Furthermore, while developed countries have better progress with vaccinating their population due to larger resources, emerging markets including Malaysia typically lags. An upward trend in daily patients also continues to drag the market.
That being said, we opine the pullback could allow an opportunity for investors to add to their local portfolio.
Most local sectors took a fall from the February high. The biggest detractors are the tech sector at -17.7% since Feb 15, while still posting year-to-date gains. With the nationwide lockdown imposed in the first two weeks of June, local equities are facing further selling pressure especially with increasing case counts within the country.
Nevertheless, we opine there are opportunities within such beaten-down sectors and would advise against ignoring Malaysian equities in investors’ portfolios.
Froth from the tech sector skimmed off
While the global tech sector globally was the darling of stock investors since the pandemic has begun, 2021 wasn’t such a smooth ride, especially for the Chinese tech companies.
The tech heavy NASDAQ and the MSCI China Information Technology Index both fell -10.5% and -23.6% from peak to trough. Such a selloff has subsequently impacted the local technology sector.
Malaysia’s technology sector is heavily dependent on the ups and downs of the global semiconductor space. Typically, local players sit among the lower to middle segments of the semiconductor value chain.
Going forward, we opine the prospect of the local technology sector to be bright as it is propelled by the pandemic. While the valuations of the sector could be stretched entering 2021, the selloff since mid-Feb has placed valuations at more palatable levels.
The sector’s fundamentals remain intact as the estimated earnings were relatively unaffected. This is likely due to the rise in global semiconductor demand which historically has been a significant driver to local tech earnings.
Financial sector to fare better over the horizon
During the fourth quarter of 2020, the local financial sector rallied amidst ongoing vaccination. Bank Negara Malaysia (BNM) has also paused its series of overnight policy rate (OPR) slashes, citing a recovery in the economy.
As the banks’ fate is predominantly tied to the general economy, recovery is similarly beneficial for the sector’s earnings, demonstrated by decent earnings of major banks such as Public Bank and Maybank reported last week for the first quarter of 2021.
With local COVID-19 cases are currently at an all-time high, there is no indication of the curve slowing down due to the figures from the recent Hari Raya festivals not being identified yet. As such, there could be future concerns of further loan impairments in the next 1 – 2 quarters.
However, it seems that earnings revision is flat, suggesting the sector to be able to weather past the current crisis. Therefore, investors who are willing to look past the current pothole could benefit from a smoother journey down the road. – June 27, 2021
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The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
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