Nevertheless, with concerted monetary and fiscal stimulus by central banks and governments globally, AffinHwang Capital says confidence is slowly being restored. — Bernama photo
KUCHING: While things are not looking good for the second quarter’s outlook, analysts say there are glimpses of hope for a recovery after Covid-19 clears up.
In its last investment strategy note for the first quarter of 2020 (1QFY20), Kenanga Investment Bank Bhd (Kenanga Research) said that Malaysian equities was set for a better year in 2020 with the resumption of earnings growth after a 2-year hiatus.
However, events that have taken a negative turn since end January – firstly, Covid-19; secondly, uncertainties due to an abrupt change in government and thirdly, oil price collapse – has forced the group to relook at its previous base case with many earlier earnings forecasts and price assumptions revised down sharply.
“Among the sectors we cover, the sharpest downgrades in FY20 core earnings were in the banks, gaming, oil & gas, and transport & logistic sectors. As a result, our year-end target level for the FBM KLCI is reduced from 1,532 points (previously revised on 10th March) to 1,463,” it said yesterday.
“The current downturn has taken the FBM KLCI to a low of 1,219 so far this year, which reflects a Price-to-Book ratio of 1.21 times, matching the low reached during the GFC in 2008.”
An even lower low was charted during the Asian Financial crisis in 1998 when the FBM KLCI fell to the lowest PB ratio of 0.64 times, it said. This ratio corresponds to 645 points on the FBM KLCI which happens to be the 76.4 per cent Fibonacci retracement (a key-support) level using data ranging from 1995 to 2020.
“This level will probably be reached in the event this pandemic prolongs, leading to a collapse of the financial system that requires a bail-out. This however, is not our base case,” it said.
The FBM KLCI closed 1,328.88 on March 30, 2020, representing a 16.4 per cent decline for first quarter of the year.
Nevertheless, with concerted monetary and fiscal stimulus by Central Banks and governments globally, Affin Hwang Investment Bank Bhd (AffinHwang Capital) said confidence is slowly being restored.
“The KLCI has rebounded by 10.11 per centrapidly from its low of 1,208 on March 19, which also seems to suggests that the economy is primed for a v-shaped type of recovery,” it said in a separate report yesterday.
“We nevertheless believe that the market still needs to assess the speed of economic recovery after the massive carnage beset by Covid-19, once economic activity resumes.”
While the devastation that Covid-19 has inflicted on the stock market had been deep, Kenanga Research believed the recovery could be as swift when the crisis subsides.
“As in the case of SARS, markets should pick up once it can be established that the number of new infections worldwide – now dominated by Europe and the US – have peaked.
“But in terms of when the new cases will peak, we estimate, from the China and South Korean earlier experiences, that peaking may occur in the West by end-April. And provided there are no incidences of another wave, it is likely that a post-Covid-19 market recovery could take place as early as May,” it estimated.
“However, doubts about a lasting recovery will likely remain out of fear of a relapse from a second or subsequent wave.
“For this reason and until it can be established that chances of recurrence have diminished, a sound risk-adjusted return strategy is for one to adopt exposures to both defensives (yielders) and beaten down alpha plays rather than an outright beta-play.”