THE outlook on Malaysian equities remains fluid with the re-imposition of the movement control order (MCO 2.0) as well as uncertainties over its duration casting a dark cloud over prospects of the 1Q 2021 corporate earnings.
Compounding the concerns is the state of Emergency that could prolong the political and market uncertainties up to 3Q 2021 (it is slated to end on Aug 1), according to Inter-Pacific Research.
“Amid the fresh uncertainties, the country’s economic and corporate earnings recovery would now be dampened/delayed until the later part of the year as the slowdown in domestic activities from the pandemic is still showing few signs of abating,” opined the research house in its 1Q 2021 strategic outlook.
“The much touted domestic COVID-19 vaccination programme has yet to begin and even though the process is tipped to start soon, its implementation date is still uncertain, and this could prolong the market’s indifference and downside bias in the interim.”
This could also mean that there is still downside bias among the FBM KLCI component stocks that could be compounded by the Employee’s Provident Fund’s potential trimming of its stakes in some index heavyweights to meet the i-Sinar withdrawal scheme which has so far amounted to some RM20 bil.
“In view of the increasingly challenging near-term market outlook, we think profit taking activities could hasten and may even intensify as market players lock-in the profits from 2020’s gains, particularly among the lower liners that emerged as the biggest winners,” Inter-Pacific Research pointed out.
“This includes last year’s leaders – glove makers – as we think they are unlikely to outperform over the near term in view of the likelihood of easing pandemic conditions from 2Q 2021 onwards that could prompt oversupply concerns later in the year even as the prognosis is for more earnings outperformance.”
In the same vein, hospitality and tourism-related stocks could also remain subdued for longer due to the extended lockdown conditions, according to the research house.
Major hurdle
Given the ongoing indifference, Inter-Pacific Research does not expect the FBM KLCI to be able to push pass its recent high of 1,680-1,695 levels.
Instead, it may linger within the 1,580-1,640 levels until there are further clarity on the market’s direction, particularly as the risk to further restrictive conditions could dampen recovery prospects.
“Below 1,580, there should be ample support at the 1,550 level with the compelling valuations providing the support,” projected the research house.
“On the broader market, we think stocks should continue to be well-supported, shaking off any near-term weakness to stay elevated for the most part, premised on their expected return to profitability in 2021 after a challenging 2020 in which the earnings of many of the lower liners and broader market shares have contracted.”
Nevertheless, Inter-Pacific Research cautioned that the recent gains might have been overdone, hence further near-to-medium term upsides could become more difficult to come by, particularly as most of the 2021 positives are already reflected in current stock prices.
“As such, there will still be bout of volatility, particularly on pandemic developments that will still be the key near term market determinant,” suggested the research house.
“Still, selected stocks in sectors like technology, energy, plantation and consumer could see increased rotational play as market players could tweak their portfolios to capitalise on the potentially stronger recovery later in the year.” – Feb 1, 2021
