PETALING JAYA: In a stock market rife with uncertainty, the upcoming third quarter earnings season could be the much-needed shot in the arm to improve investor sentiment.

While sentiment on Bursa Malaysia may remain cautious amid political uncertainties ahead of Budget 2021, UOB Kay Hian Malaysia Research expects stocks to rebound as investors’ focus shifts towards the results season.

“We expect the upcoming reporting season to form a key market re-rating catalyst, as key glove manufacturers (particularly Top Glove Corp Bhd) are on course to report stratospheric earnings, and should also guide for loftier profits in the subsequent quarter.

“Ample global and domestic financial liquidity, coupled with an expected protracted period of a globally ultra-low interest rate environment, will continue to support relatively high equity valuations, ” stated the research house.
Speaking with StarBiz, MIDF head of research Imran Yassin Md Yusof (pic below) expects corporate Malaysia to enjoy better earnings generally in the third quarter of 2020 – on a sequential basis.

This is due to the fact that Malaysia has witnessed a resumption in economic activities, unlike in the April-June 2020 period where the operations of most businesses were terribly impacted due to the movement control order (MCO).

“However, we do not expect it (earnings season) to be at pre-Covid-19 level, given that recovery is gradual.

“We also expect the stimulus measures implemented by the government such as the Penjana stimulus package will provide a solid support in general, ” he said.

Imran added that the healthcare sector, which includes glove makers, would continue to outperform other sectors in the third quarter.

“Our expectation is based on the fact that demand for their products remains strong and margins continue to expand, ” he said.

The banking sector, however, is expected to underperform despite the sector’s improvement in earnings as compared to the second quarter of 2020.

“This is due to the expectation that provisions will remain high. Furthermore, there seems to be a lack of visibility of the asset quality of banks after the ending of the loan moratorium, ” according to Imran.

Echoing a similar view, fund manager Danny Wong also believes the third quarter earnings season will be better compared to the second quarter.

However, in a year-on-year comparison, he said many sectors would continue to see dampened earnings performance.

“On the quarter-on-quarter basis, there will be two extremes. On one extreme, there will be sectors whose earnings remain bad or turn from bad to worse. These include companies in the tourism and hospitality sectors.

“On the other extreme, you would see companies that continue to record good or even better earnings growth. Examples would be those in the glove manufacturing and technology sectors, ” said Wong, who is the chief executive officer of Areca Capital.

As for other sectors such as construction and property development, he described the earnings growth as “likely to be neutral”, despite some signs of business improvement from the second quarter.

“If investors are able to hold for one or two years and wait for the business fundamentals to gradually improve, they can surely consider stocks in the sectors that now appear to have a neutral outlook, ” he said.

Looking ahead to the fourth quarter earnings season, Wong said the technology and glove sectors would likely continue to lead the market in terms of earnings performance in the fourth quarter of 2020.

Meanwhile, MIDF Research’s Imran foresees the positive momentum of corporate earnings to continue, as long the economic recovery remains intact.

“However, we recognise that there is a downside risk to this such as the resurgence of the Covid-19, which has led to conditional MCO (CMCO) being implemented in the Klang Valley.

“Nevertheless, for now, we believe the economic impact of the CMCO is limited, given that it is less restrictive than the targeted enhanced movement control order or TEMCO.”