As the Covid-19 outbreak situation in our country is getting worse everyday, our government has decided to implement another round of MCO (MCO 2.0) in 6 states which will be commenced from 13th January to 26th January 2021.
Following the announcement of MC0 2.0, the palace of the royal family then released a statement on emergency proclamation (Darurat) as part of an effort to curb the Covid-19 pandemic without the disruption of political instability.
As an investor, news like these are overwhelming. We can’t help but to worry about our portfolio holdings. So, let me share my humble opinion on how I expect the local stock market to perform after this:
1. Effect of MCO 2.0
The implementation of any sort of lock downs will always be bad for the economy. This is well witnessed during the stock market plunged in March 2020 when our country was in nation lock down due to the pandemic. This is because all businesses were expected to perform badly (which most of them did) during the MCO as many sectors were not allowed to operate normally during that period of time.
Forward to today, will the history repeat itself in MCO 2.0?
Well, I believe MCO 2.0 will definitely affect many businesses but it should be less severe than the first MCO. This is because:
- MCO 2.0 lock down only involves 6 states instead of a full nation lock down like previous MCO
- Due to the previous MCO, many businesses have evolved and adapted to the new norm. Therefore, most of them are well prepared for MCO 2.0
- Unlike previous MCO, many businesses and sectors are allowed to continue operate amid MCO 2.0
2. Darurat (Emergency State)
As announced by our Prime Minister, this Darurat will be completely different from the Darurat we had in May 1969. We won’t be seeing any armies taking control of the street. This time around, the Darurat will only involve the political scene.
This means that the parliament will be suspended to give the federal government full authority to carry out any policies that deemed necessary in order to solve the pandemic issue in the country.
Well, most investors might not like the idea of Darurat as it present the idea of instability happening in the country, economy, and also the government itself. Therefore, the sentiment in our local stock market will definitely be bad in the near term. But if you look further, the Darurat might be a necessary move to overcome the nation Covid-19 pandemic situation. We all know that the current government is actually facing many headwinds internally and also from the oppositions, which pose a risk of a general election during such critical time.
With Darurat implemented, at least the government could fully focus in battling the Covid-19 pandemic in our country. In near terms, the stock market will definitely look bad and unfavorable. Well, this might give us a chance to buy into good fundamental stocks that we have missed out during the previous rebound.
3. Affected Sectors
Sectors related to recovery play will definitely be affected again. Please be extra careful with sectors related to Travel & Tourism, Retail, Aviation, Financial, Gaming.
We have seen some recovery in most of these sectors in the past few months. This means that most of their share price have actually rebounded quite a bit from the previous drop. As such, their downside risk is higher as compared to other sectors.
I will not get into detail of the risk behind each sector here. Do drop me a comment if you will like to know further.
4. Defensive Sectors
Personally, I believe the best sectors to have in your portfolio right now to hedge against the pandemic will be the Rubber Glove and Semiconductor sector. As we all know, the Covid-19 pandemic has impacted most businesses badly in Malaysia and worldwide.
The Rubber Glove is one of the sectors proven to be pandemic-proof. Due to the increasing demand for rubber glove in the whole world, the demand has far exceeded the supply of rubber gloves available. As such, the average selling price of glove has been increasing to a skyrocket level which give all rubber glove companies an handsome margins of profit to work with.
At the point of writing this article, the whole world is still battling Covid-19 pandemic, and there is no signs of slowing down even with the vaccines available. Even though all rubber glove stocks price have been hammered down in the past 2 months, I believe the downside is minimal at current price level. The fundamentals of rubber glove businesses are still intact and getting better every quarter. So it is a must to have a portion of rubber glove companies in your portfolio.
Semiconductor is another sector which has been performing really well during the whole pandemic period. The rollout of 5G smart phones has caused Semiconductor companies to stay busy as more semiconductors are needed in these 5G smartphones. Due to the sudden surge of demand for semiconductors and chips, many other sectors are currently facing shortage of semiconductors and chips supply for their product. This is well witnessed in the automotive industry, whereby carmakers such as Honda Motor Co and Nissan Motor Co are left with no options but to cut production due to the shortage of chips for its car production. (Source: TheEdge)
At the end of the day, we can only assume how the market will behave based on our experience. Whether it will behave according to our expectation is another story.
In order to stay on the safe side, we always need to manage our portfolio risk. Whether to cut loss, take profit, or to hold.. these should be the questions you should be asking yourself.
Since we are unsure of how the situation will turn out, this will be my advise if you are worry about your existing portfolio:
Scenario 1 – Stock Price Drop
You can choose to sell and cut loss/take profit first for the time being. If the stock price indeed drop as expected, you can buy again at a lower price.
Firstly, your risk is minimized.
Secondly, you can buy back at a lower price to maximize your potential profit when the stock rebound.
Scenario 2 – Stock Price Increase
You can choose to sell and cut loss/take profit first for the time being. If the stock price increases after you have sold which is against our expectation, you can always buy back at first sign of rebound.
Firstly, your risk is minimized again
Secondly, if the stock price rebounds, your buy back price might be a little bit higher from your previous buy price. At most, you earn few cents less than you supposed to, but your risk is minimized.
Scenario 3 – Plenty of Cash
Well, if your portfolio holding is less than 50% of your total capital with the rest being cash in your account balance, you can always hold and average down when the stock price drops.
All 3 scenarios are only effective if the company is having Good Fundamental as foundation.
I believe MCO 2.0 will be extended after two weeks, as two weeks time will not be enough to curb the spread of Covid-19 pandemic.
MCO 2.0 and the Darurat will only affect the sentiment of our local stock market in the short term. The drop in share price due to these reasons might serve you a good opportunity to buy those fundamentally good stocks at cheaper price.
Always remember it is really important to only invest in good fundamental companies. These companies are usually the fastest ones to recover in price after a bear market. We do not have to worry about the decline it share price if the company we invested is fundamentally strong as the share price will always recover to reflect its true value.
2021 might not have started like what we have expected, but do remember there is always rainbow after rain.
I wish all of you a good year in 2021, be patient with your investment and you will definitely see success at the end of it.