First, the bull rebound from the US markets was a bit confounding. As more protests and negative issues rose to the fore, the stronger the markets rallied. In Malaysia, local stocks even went beyond linked to major markets by rallying on its own. Small caps were bought up in a frenzy. Breaking all time volume highs day after day. The rotational play to mid caps and then big caps further alienated most analysts.Even chartists were guarded. There was this regional house that have been putting our bearish posts day after day(for the past few weeks) based on technicals, so much so it became a running joke. I told my market old friends that once this house goes bullish we should all exit. At first they were basing their bearish views based on technicals. But for the last few days, their bearish stance was more like a drunk holding onto a lamp post at night - the lamp post being technicals/fundamentals ... holding onto the lamp post more for support than for illumination.
Why the disconnect? Market experts immerse themselves in the paradigm of investing based on certain parameters of valuation. They may understand that markets are necessarily forward discounting machines, but they cannot project that far out as the "blow-out" (bankruptcies and tepid demand) has yet to show itself in the next 2-4 quarters.
Are investors discounting further out? Yes and no.
"I generally think that most governments have thrown out way too much cash to rescue their economies over the pandemic. I think we will see a huge surge into equities for the remainder of the year. Why? We are nowhere near the factors necessary for The Great Depression nor The Asian Financial Crisis. Last check, some people may lose their jobs, some industries may be devastated, but the majority still have cash in the bank, the majority still have equity in their properties - that is not the recipe for any great depression. Now start counting the monies thrown at the problem."
http://malaysiafinance.blogspot.com/2020/05/major-asset-class-returns.html
I turned bullish on 18th May 2020 because tabulating the amount of funds being thrown at the problem has led to one main consideration: is the pandemic as bad as the 2008 subprime crisis?; is it as bad as the Asian financial crisis 1998?.
In both cases there were massive debts to be unwound, plenty of bankruptcies to contend with, and naturally plenty of jobs will be lost and consumer spending will be shrunk for at least a couple of years. More than that, personal "assets" will be massively eroded for many.
How does that pan out compared to this pandemic: yes plenty of businesses and sectors will be devastated BUT ... most industries are still viable, those with cash flow issues will face huge obstacles but still we are talking about a tightening 3-6 months, while the above crisis has a longer lasting shrinkage lasting 1.5-2 years out.
Secondly, most people still have "assets and equity" (property, shares) unlike the previous two crises. As things go, China has been coming out well after a 3-4 month lockdown. Other Asian countries not that terribly affected (Malaysia, Vietnam, Cambodia, Thailand) have also shown promise as the earlier ones to try and resume economic activity. Hence we are seeing 1-3 months lockdowns, followed by 2-3 months of tepid reemergence of economic activity, another 2-3 months we should be back to 70-80% normalisation of economic vibrancy. All in it should be less than one year.
The amount of funds thrown by governments has been a lot higher than the subprime crisis, or the Greek/euro crisis. Go figure.
https://www.investopedia.com/government-stimulus-efforts-to-fight-the-covid-19-crisis-4799723
Go to the above link to check the amount of funds and stimulus from each country and you know we have an overkill situation.
ITS THE IMMEDIACY OF IT ALL
The economic impact by the pandemic is more "immediate and direct" as we felt it close, all of us. Friends' businesses in trouble, most retail businesses were drained dry. All of us had friends and family members losing their jobs almost immediately. Owing to the "closeness" of the impact, many of us failed to look at the bigger picture. Previous crises were more drawn out, company failures were more drawn out, job losses were more drawn out. The example of having 100 hits over 2 years or 10 big hits over 6 months. Plus the fact that the "wiping of of wealth, equity and personal assets" have been more concentrated at direct retail sectors (plus leisure and tourism), and not so much at personal level.
The pandemic struck hard and fast. Because its not a normal economic collapse due to bubblelicious financial extravagance, because it involved deaths ... the immediacy of the situation caused a lot of people to react with extreme caution. Lockdowns, lockdown, curbs... The immediacy of it all also forced the hand of all governments to respond swiftly, and in many cases, an overkill. Its already well known that the stimulus and recovery funds injections by the USA is a few times that was undertaken during the 2008 subprime mess.
As lockdowns are being eased we can see plenty of pent up demand. It wasn't so much like a long drawn out recession mode. Chicken or egg thing, the markets' resilience has helped mitigate the wealth effect and in fact has spurred the velocity of money. In most cases the velocity of money in the markets will have a strong impact on their respective economies. Not all countries will be the same, you have to look at the percentage of GD that is listed for each country. Side note: Malaysia is one of the top countries that has the highest percentage of its GDP that is listed.
ITS NOT FINANCIAL EXTRAVAGANCE
Dear all analysts, this was not a market correction due to financial extravagance like the Asian crisis, bubble dotcom collapse or the subprime messier the Greek/euro calamity. When its financial extravagance, there has to be a sustained wringing of excesses from the market place. Where's the excesses here? We do have companies failing especially if your fortune are directly linked to the pandemic: airlines, tourism, leisure, malls, REITs, etc.. but it was not due to excesses. Hence when you whack all and sundry 25%-35%... it was a recipe for a sharp recovery in share prices.
I do agree there will be more bankruptcies and tough times for selected industries over the next 3-12 months but it should not be prolonged because most of us we still have equity, assets, jobs, health ... Put yourself in the situation in 1998-2000 after the financial crisis, how was that for you?
In the US, money-market funds have lured $1.2 trillion this year, while fund managers with $591 billion overall are holding cash at levels rarely seen in history ... Investors are still underweight equities and signs of overextension are confined to momentum traders, JPMorgan strategists: There is still plenty of room for investors to raise their equity allocations. JPMorgan says the equity allocation of non-bank investors -- a group that includes households, pensions, endowments and sovereign wealth funds -- will probably rise to 49% in the coming years, given the backdrop of low interest rates and high liquidity. Currently, the proportion is 40%.
The dismal interest rate for the general public is another factor prompting many newbies to enter the market.
THE GLOVE FACTOR
As the sector surge more and more, many are shaking their heads.
Maybank Kim Eng analyst Lee Yen Ling wrote that “massive earnings explosion in coming quarters will throw brokers’ forecasts out of the window”. Lee has raised its target price of Top Glove to RM20, implying a 49% share price increment from the current price of RM13.38 amid expectation of higher average selling prices (ASPs) and exponential growth on glove consumption worldwide. Maybank KimEng raised its earnings per share forecast by 37% for the financial year ending Aug 31, 2020 (FY20), 180% for FY21 and 18% for FY22 to impute for ASP hikes and spot orders until 1QFY21 (September to November 2020). “Our earnings forecasts could still be conservative as glove players might continue to raise ASPs until June 2021,” said Lee.
So you are looking at "highly robust" quarterlies from them for at least the next 4-6 quarters. One needs to ask is this the new normal - when things die down a year out, how will demand be then? There is a new normal. Even a year out and things have settled back to normalcy, I still see a lot more "new buyers" as stocking up will be a new norm. Government agencies, retail sector and related sectors will be more keen to be stocked up in "essential items" to prepare for future outbreaks or pandemics. The SARs did lift demand but it did not translate to a huge breakout in demand following that because SARs wasn't so widespread. This time its global so the impact cannot be dismissed lightly. But SARs was largely a southern China plus HK matter and some neighbouring Asian countries, but only 8,000 deaths. COVID19 - deaths the far 402,000. What that means: new buyers (government agencies, hospitals, NGOs, even personal inventory) even after the pandemic is over.
While the business isn't really like a moat around a castle, the barriers to entry is the time lag to enter the business. You need at least 5 years to be viable and being able to reduce cost via economies of scale to compete with the Big 5 or 6 players. You need to be in Malaysia and Thailand for access to latex (though not essential but it helps). You need trained workers and relatively competitive labour (again, Malaysia and Thailand).
Glove makers are now an essential component of any major index funds for Asian or regional exposure. Imagine new funds or ETFs to be launch for Health Services or Healthcare, .... who are the beneficiaries. This sector will be increasingly mopped up by those type of funds plus indexed funds. Glove makers used to be a maybe you need to have in your portfolio. Now it has graduated to becoming an essential exposure for any long fund with any credibility. Any correction will be mild. Unless they go way past the levels cited below.
This is unlike a pump and dump situation. This is a situation where there are plenty of speculators, traders and institutional funds looking at one sector. Their next 4-6 quarterlies should be magnificent. Expectations will be met or even surpassed. We are talking real profits and not imagining profits 3 years out. Hence I see the glove makers' rally continuing albeit with some corrections but any corrections should be short lived.
I would probably advise to cut your trading/portfolio positions by 50% once these prices have been passed:
Hartalega RM14.00
Top Glove RM24.00
Kossan RM11.00
Supermax RM10.50
Comfort RM4.50
(these levels are derived from the view in light of their fundamentals and institutional liking plus traders' favoured counters)
Another 10% from these levels I would strongly advise to ignore the glove makers.
p/s: this is just an opinion and not a call to buy or sell, please consult your dealers and remixers and do your own research , you are responsible for your own actions
