The equity markets could see another steep correction this year, as corporate earnings may deteriorate further than estimated due to the COVID-19 pandemic, said Affin Hwang Investment Bank.
However, investors could still stay invested in equities, said Affin Hwang senior associate director Loong Chee Wei, as valuations have begun to turn attractive for certain sectors.
Speaking at a webinar hosted by the Malaysia-China Chamber of Commerce (MCCC) today, Loong said that the full impact of the COVID-19 lockdown will be seen in the second-quarter corporate earnings.
“We believe the market, in pricing in a V-shape recovery of the economy, is underestimating the impact of the COVID-19 pandemic.
“While consensus estimate for earnings among FBM KLCI component stocks is a 3% drop, Affin Hwang is expecting a steeper 13% decline.
“During the 1998 Asian financial crisis, corporate earnings fell about 60%. During the 2008 global financial crisis, it fell 49%.
“It will be a negative surprise when the actual results come out,” he said.
Affin Hwang projects the KLCI to settle at 1,200 points this year. The benchmark index closed at 1,376.93 points on Wednesday.
Loong, when asked, expects further correction to be seen through July, with volatility for the rest of the year.
“It will be a W-shape recovery for the market,” he said.
GDP may shrink 3.5% on weak private consumption
Affin Hwang is projecting a steeper GDP contraction of 3.5% for Malaysia this year, as opposed to a 2% contraction in Bank Negara Malaysia’s (BNM) low-base scenario.
The more conservative outlook by the research house is because it expects Malaysia’s private consumption to contract at a steep pace of 4.5% this year versus BNM’s projection of 4.2% growth.
“There are already negative indications for private consumption here, for example the 59% contraction in car sales in March,” Loong said.
“Even with the relaxation of the MCO (movement control order), it will be a slow start as the people are cautious about spending, and particularly on job security.
“With that in mind, people are thinking twice about spending such as on houses and cars when they are finding it hard to even get food on the table,” he said, referring to how the nearly two months of MCO have severely affected the ability of some companies to remain in business.
There is also a risk of delays in public spending. While the government has pledged to support the economy by continuing the slew of big projects announced previously, the MCO has caused delays in ongoing projects implementation, and could result in budget constraints.
“There is also a view that large-scale projects such as MRT3 could face delays due to the government’s preoccupation with the current crisis.
“And for example, the mass COVID-19 screening tests imposed on construction workers will add another layer to the [time needed to resume operations],” Loong said.
Value emerges in select sectors
Sector-wise, Loong said Affin Hwang is giving an “outperform” call on glove makers and “neutral” on consumer products, healthcare, real estate investment trusts (REITs), property, and technology sectors.
“The reason REITs appear attractive is their dividend yield, which is on average at around 5% relative to the MGS (Malaysia Government Securities) of around 2% at most.
“Property stocks have experienced a sell-off and are trading below their book value, with average share price discount to book value at a historical high,” he said.
Affin Hwang’s top picks include glove makers, Genting Bhd, QL Resources Bhd, YTL Power International Bhd, Inari Amerton Bhd, Sunway Construction Group Bhd and Taliworks Corp Bhd.