AFFIN Hwang Capital believes that the stock market recovery from its year-to-date low of 1,208 is temporary, and that the market is downplaying the economic impact of the Covid-19 pandemic, as well as overestimating the revival of the economy once normal activity resumes.
Concerted monetary and fiscal stimulus by central banks and governments globally have restored confidence in global equity markets, which includes the FBM KLCI’s rebound of 10.11% from the low of 1,208 on March 19. This suggests the economy is primed for a V-shaped recovery, says Affin Hwang.
“We nevertheless believe the market is overestimating the speed of economic recovery after the massive carnage beset by Covid-19, once economic activity resumes,” said the research house.
Affin Hwang also believes that a U-shaped earnings per share (EPS) recovery is on the cards, due to long-lasting economic anxiety from Covid-19. All the uncertainty makes it too premature to factor in a V-shaped recovery, as the Covid-19 pandemic sees infection and mortality rates continuing to climb with nary a vaccine in sight.
“Based on Bloomberg consensus, the street expects the KLCI’s 2020 EPS to grow 2.69% year-on-year (yoy). In the past, when gross domestic product (GDP) contracts, EPS growth tanks. In our view, the street’s looming earnings cuts will lead to a KLCI de-rating,” says Affin Hwang, which also believes the market remains too optimistic.
Conversely, the research house expects an EPS contraction that is set to widen to 12.7% yoy for the KLCI, cutting EPS growth to -14.7% yoy. It also warns of a recession in 2020, with the belief that economic recovery will only materialise in the later part of 2021.
“We believe that corporate earnings growth will not only decline in tandem with the economy, but likely also linger as the negative impact from Covid-19 and the country’s lockdown filters down to the economy,” said the research house, believing that the KLCI will likely bottom out at 1,008 points. — March 31, 2020
