Sunday, May 03, 2009

Which Sectors To Benefit?

THE bad times will end. It is just a matter of when. It is hard to mark that date on our calendars as recent economic data keep presenting a mixture of horrific tales (of more challenges to come) and hopeful signs (that the worst is over and recovery could be sooner than expected).

It’s not surprising then that among market pundits, there are widely contrasting views as to whether the road ahead for the global economy is going to be a U-, V-, W- or L-shaped recovery. (A recovery pattern with a U shape indicates a slow and gradual recovery process, while a V shape indicates a fast and strong recovery once prices have hit the bottom.

A W shape indicates a sharp rebound that will be followed by another decline before recovery sets in again, while the L shape indicates minimal rebound following the trough.)

But just as a majority of us have started to subscribe to the optimistic view that the global economic crisis has already hit bottom and is now climbing its way up after falling off the cliff, a bug suddenly comes our way.

The outbreak of swine flu over the week has now dampened whatever tentative signs of an earlier-than-expected economic recovery.

There are now concerns that the disease will bug several industries namely tourism, food and transportation, and deepen the recession of several major economies, particularly the United States, and prolong the recovery process of others.

Reports about the new bug are likely to hog the headlines over the short term; and hence, cast a dark cloud over some of the leading stock markets in the world, with major casualties expected to be the aviation and leisure counters.

On a positive note, however, it is widely believed that the swine flu can be contained before it reaches pandemic level.

This is based on the previous experiences of governments worldwide in handling the outbreak of other deadly diseases such as the severe acute respiratory syndrome (SARS) and bird flu.

In addition, analysts believe that the effects of the swine flu on the Malaysian market are likely to be muted.

Defensive play
Still, given the current market condition, most analysts agree that the storm has yet to abate.

Hence, defensive sectors such as gaming, rubber glove, consumer and utility such as power and telecommunications are still the preferred bets for at least up to the first half of the year.

These defensive sectors have one thing in common - demand for their products and services are relatively inelastic. This element ensures stability in their income flow.

Take the gaming sector. Its appeal lies in its luck factor. In good and bad times, the gaming arena provides consumers with the opportunity to make easy money. So, numbers-forecast operators such as Tanjong plc and Berjaya Sports Toto Bhd are expected to continue enjoying brisk sales irrespective of the current market conditions.

Even for casino operators such as Genting Bhd and Resorts World Bhd, customer attendance is likely to remain resilient.

OSK Research in its report says it expects the negative impact of the swine flu outbreak on Genting Highlands visitors’ arrivals to be insignificant.

It believes that casino patronage, which contributes more to Resorts’ earnings, would reflect greater resilience as a large majority (85%) of them comprises the captive domestic day-trippers market.

Meanwhile, the rubber glove sector, as a proxy to medical services, has been one of the biggest gainers since the recent outbreak of the swine flu. The sector is a direct beneficiary from the present turn of events.

Share prices of rubber glove makers surged over the week on expectations that the epidemic would spur demand for their products.

OSK Research in its recent report says rubber glove manufacturers are likely to experience a one-off jump in sales orders due to a strong chance of stock replenishment as most of their customers have been holding minimal stock level in anticipation of slower demand amid the global economic crisis.

The research outfit, which has an “overweight” call on the rubber glove sector, views Hartalega Holdings Bhd and Kossan Rubber Industries Bhd as the main beneficiaries as more than 90% of their gloves are dedicated to the medical segment, with the US and Europe being their largest markets.

Despite the volatile market environment, low-risk sectors such as utilities and consumer staples (food and tobacco) will unlikely see much of a financial impact.

This is because consumers in general do not have much discretion to eliminate consumption of the goods and services provided by these sectors (even though consumers may have turned more cautious in their spending as their disposable incomes come under pressure in view of the poor job market outlook).

In addition, most of these counters have high dividend yields, which makes them especially resilient during these challenging times.

Pump-prime beneficiaries, crude revival
While defensive sectors are safe bets, OSK Research head Chris Eng believes that performances of those counters could lag behind sectors that are seen as direct beneficiaries of the Government’s stimulus packages going into the second half of this year.

With that, he advocates a change of strategy, barring any other unforeseen shocks to the economy.

Eng’s bullish sentiment on the construction and building materials (such as steel and cement) sectors is shared by most analysts, who believe that these sectors are likely to see an increase in order books in the next few months as the roll out of the government stimulus packages intensify.

Ultimately, the performances of construction and building materials sectors boil down to how the government is going to spend the stimulus monies, says MIDF Research head Zulkifli Hamzah.

Meanwhile, the second half of the year will also likely witness a recovery of crude oil prices from the present average of US$50 per barrel level to the US$60 per barrel level.

This scenario is mainly underpinned by the production control as implemented by the Organisation of the Petroleum Exporting Countries, says TA Research head Kaladher Govindan.

With that, most expect investor interest in oil & gas counters to be revived by the second half of the year in tandem with the expected rise of crude oil prices.

When crude oil prices fell from its peak of US$147 per barrel in July last year to around US$40 per barrel early of the year, many oil and gas projects, especially those involving non-conventional and deepwater oil, were rendered not commercially viable to carry out. As such, there will be more oil & gas projects coming on stream if crude oil price regains its upward momentum.

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