The world is still in the middle of a pandemic. Daily news headlines are grim. Globally, the resurgence is widespread with many countries now reporting record-high numbers of new Covid-19 cases.
Across Europe, including in France, Germany and the UK, governments have tightened lockdown measures, although they are less draconian than those imposed during the initial wave. Even in the US, some states are enacting stricter mask mandates, gathering restrictions and stay-at-home advisories — contradictory to the stance embraced by the outgoing Trump administration. Back home, in Malaysia, most states are now under a renewed Conditional Movement Control Order.
All of the above makes for worrying headlines, especially in the northern hemisphere, where hospitalisations are rising rapidly heading into the cold winter months. Pandemic fatigue is real — and it is contributing to the surge in infections.
Things will get worse before they get better. But they will get better. One of the best leading indicators is the stock market, which is always forward-looking. And we have repeatedly articulated why we are bullish on global stocks in this column.
Amid all the grim Covid-19 headlines, stock prices have continued to move higher. The Dow Jones Industrial Average and Standard & Poor’s 500 index hit fresh alltime highs last week. Notably, cyclical stocks — companies that were hardest hit by the pandemic and have the most to gain on economic normalisation — are leading the rally this time. Back in March, when stocks rebounded off their lows, tech and stay-athome companies spearheaded that rally.
We find that, historically, in most instances, the market is right. The latest leg of the rally is underpinned by very encouraging developments on the vaccine front.
Pfizer announced that its Covid-19 vaccine, developed with German-based BioNTech, has 95% efficacy in the final analysis, well above the initial public expectations of around 60% to 70%. Moderna, another biotech company that is leading the Covid-19 vaccine race, said its interim results showed 94.5% effectiveness.
And we know there are many more, likely further ahead in R&D, manufacturing and applied especially by Chinese companies. There is obviously an inherent bias towards Western biotech companies but ultimately, there will be many options globally.
Yes, there remain issues such as distribution logistics. For instance, Pfizer’s vaccine requires deep freeze storage and transportation infrastructure. Nonetheless, with a dozen candidates currently in final-stage trials, on multiple platforms, and at least 200 more under early clinical and pre-clinical evaluation, the mass availability of vaccines is a matter of when, not if. Some of the most promising vaccine candidates are already being manufactured “at risk”. In the meantime, the global mortality rate continues to decline — for a host of reasons we have previously discussed.
Businesses are faring far better than initially feared. According to FactSet, earnings for S&P 500 companies are on track to decline by just 7.1% in 3Q2020, well ahead of the -25.3% projected at the mid-year mark. Indeed, earnings — estimated to grow 22.1% in 2021, following an estimated contraction of 14.5% this year — are set to return to pre-pandemic levels in 2H2021.
To be sure, the pandemic has hit smaller businesses disproportionately hard. Even then, the US NFIB Small Business Optimism Index has recovered to pre-pandemic levels in the latest September and October readings.
In short, we believe the global economic recovery in 2021 will be stronger than many currently expect — as the recovery in services catches up with that in the manufacturing segment.
The global manufacturing PMI output index has already rebounded strongly. In fact, it is outpacing the official global production data (see Chart 1). This suggests optimism for the future, given that the Purchasing Managers’ Index survey includes components that are based on expectations and decisions that result from those expectations.
According to the October IHS Markit Covid-19 recovery survey, the majority of countries have become more upbeat about the recovery progress compared with the previous survey in June, with companies in China and the US being the most optimistic.
China, which was the first country to suffer the Covid-19 outbreak, has recovered far more quickly than the rest of the world, thanks to its success in containing the virus’ spread. The latest IHS Business Outlook survey found that confidence among Chinese businesses is now at the highest since February 2015, underpinned by expectations for strengthening exports — on the back of a global economic recovery — as well as domestic demand. A case in point: Consumer spending is catching up with industrial production recovery — retail sales y-o-y growth gained traction for the third straight month (see Chart 2).
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It goes without saying that business confidence is key to future investments, profitability and overall economic growth. Businesses will not invest in new productive capacities if they are pessimistic about the future — and this is quite likely a reason why Malaysia is falling short on the investment front.
Investment as a percentage of GDP in the country has been on the decline for years as Malaysia pursued an unsustainable consumption-driven growth strategy. The growth in gross fixed capital formation is weakening, in both the private and public sectors (see Chart 3).
Charts 4 to 7 track the manufacturing PMI and industrial production index (IPI) growth for Malaysia, Thailand, the Philippines and Singapore for the past three years. Notably, the PMI in Malaysia — as a proxy for business confidence — was in the contractionary zone (PMI<50) for the majority of the months. This was so even when actual IPI output was recording positive growth. And it is in stark contrast with the situation in our neighbouring countries — where businesses were generally far more upbeat even when IPI dropped into negative territory.
Why do Malaysians appear to be the most pessimistic of the lot? We have our suspicions on the reasons and our readers will have their own views on this.
Whatever the real reasons may be, it emphasises the importance and urgency for the government to pick up the slack — by increasing capex for productive projects that will enhance the country’s competitiveness, create high-quality employment opportunities and lift living standards — and hopefully, be the catalyst for rekindling the animal spirits and optimism in the average Malaysian.
Let us end with an appropriate quote by Helen Keller: “Optimism is the faith that leads to achievement. Nothing can be done without hope and confidence.”
The Global Portfolio was more or less unchanged for the week ended Nov 19. Total portfolio returns now stand at 38.1% since inception. This portfolio continues to outperform the benchmark MSCI World Net Return index, which is up by 27.6% over the same period.
Taiwan Semiconductor Manufacturing (+6.7%), Builders FirstSource (+4.9%) and Singapore Airlines (+3.3%) were the big gainers for the week. On the other hand, Alibaba Group Holding continued to see selling pressure, closing 3.7% lower for the week. Home Depot (-2.9%) and Microsoft (-2.5%) were the other notable losers.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
