Last week, we highlighted the latest statistics showing that financial positions for Malaysian households and domestic consumption remain resi lient in the face of the deep shock to the economy brought about by the Covid-19 pandemic.
This week, we continue the series by looking at the domestic banking system, which is the lifeblood of any economy. Finan cial institutions are often the most vulnerable segment during a crisis when liquidity drops, demand for loans dries up and impairments rise. In the worst-case scenario, banks can turn insolvent and create systemic risk to the broader economy.
Banks were not spared in this current crisis. Aggregate earnings of all listed banks on Bursa Malaysia fell 30% y-o-y in 1H2020 — dragged down by higher aggregate allowances for impaired loans and one-off modification losses.
We see the sharp rise in impairment provisions, including pre-emptive provisioning, as more of a prudent move. Meanwhile, the modification loss is an accounting treatment under MFRS 9 (Malaysian Financial Reporting Standard 9) for the delayed repayment, owing to the automatic six-month loan moratorium. This is a non-cash line, the bulk of which will gradually reverse with the resumption of loan repayments. In fact, given the reduction in cost of funds, these loans are likely to turn net positive cash over the medium term.
As the charts will show, the overall banking system remains stable, with ample liquidity and buffer against future impairments. In fact, the banking system is in a much healthier position than in previous crises. That said, we do not preclude the possibility that a couple of banks may face serious difficulties in the months ahead, owing more to bank-specific conditions that have nothing to do with the recent economic challenges stemming from the pandemic.
The Global Portfolio traded 0.2% lower for the week ended Oct 22, which is better than the MSCI World Net Return index’s 1.5% decline. Last week’s losses pared total portfolio returns to 37.9% since inception. Nevertheless, this portfolio continues to outperform the benchmark index, which is up 21.2% over the same period.
Ericsson was our top gainer for the week. Its shares surged 15% after the company reported better earnings and margins for 3QFY2020 and guided for a robust outlook. The rollout of 5G networks worldwide will gather steam. Ericsson is winning contracts in China, which currently has the most advanced 5G coverage, and market share in the rest of the world.
At the other end, Vertex Pharmaceuticals saw its shares plunge 22.1%. The company announced that it was discontinuing one of its pipeline drugs, owing to adverse effects in trial. As a result, sentiment turned negative, even though the drug was expected to be a marginal contributor to earnings if successful. We think its share price will rebound, as its commercialised drugs will continue to enjoy strong growth for the foreseeable future.
What a profitable story
Stock prices driven purely by investor sentiment based on the prevailing “hot themes or thesis” that are detached from earnings and valuation metrics are certainly nothing new. They happen in all markets, sophisticated or otherwise, often perpetuated by overexuberant analysts. We have highlighted several examples in the past — such as in the valuations of WeWork, Tesla, Beyond Meat and, closer to home, glove makers.
This week, Mah Sing Group — a property developer of 55 years — saw its market cap double practically overnight, by jumping onto the glove bandwagon. Indeed, many stocks have seen their prices surge simply by latching on to the themes of the day.
Lest we forget, gloves manufacturing is a business that requires little intellectual property. There is no lack of knowledge operation-wise nor is there any licensing restriction. The world has ample and easily accessible raw material, as well as plenty of cheap land and empty factories for rent. So, why should there be such abnormal profits?
Hello, analysts … businesses do not operate in a vacuum. Are you going to use the same profit forecast for the next 100 companies that announce ventures into glove making?
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