First,
the bull rebound from the US markets was a bit confounding. As more
protests and 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 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.
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.
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 fail 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.
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.
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" quarterly from them for at least the next 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.
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 quarterly will 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 view 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
http://malaysiafinance.blogspot.com/2020/06/the-markets-disconnect-to-real-economy.html
