18.05.2021 (www.thesundaily.my) - PETALING JAYA: Investors should seize the opportunity to go long and ride this new commodity upcycle by looking into stocks with strong pricing power and attractive valuation, according to TA Research.

“While for downstream and consumer stocks, which are the most susceptible to change in commodity prices, even though profit margins are vulnerable, the net effect on corporate earnings will still be positive as the higher demand and better pricing power should boost nominal sales and negate the impact of rising cost,” it said in a report today.

The research house believes the strength in commodities will be supported by the global economic recovery and acceleration in the reopening phase in various countries, potentially by first-quarter 2022 (Q1’22), which will pave way for a return to normalcy in 2023.

“While it’s undoubtedly positive for the earnings of commodity producers, it could ultimately ring the inflation alarm and increase monetary tightening in the coming quarters.”

It said the development of vaccination, the ongoing vaccination programmes, and huge stimulus measures globally to steer back the economy on a steady growth path in the coming years are the main drivers of commodity prices.

The research house said commodity prices started with a bang in 2021, from oil and base metals to livestock and agriculture products, surging to levels not seen for years.

“The outlook is heavily dependent on the recovery path of the Covid-19 pandemic. With many key trading nations, including Malaysia, targeting to hit at least 70% inoculation by Q1’22, the path to economic and earnings rebound is real and solid.

“We maintain our positive view on the market in anticipation of economic and corporate earnings recovery, buoyed by the rally in commodity prices and recovery in demand,” it said.

On oil prices, TA Research said the reopening of locked-down economies would kickstart global recovery and boost demand for transport fuels.

“The restoration of manufacturing output will catalyse demand for petrochemicals. Hence, all this will propel demand for crude oil and natural gas. The production will ramp up, and lead to resumption of O&G capex spend. Correspondingly, demand will surge for tanker shipping, as well as offshore fleet and services.

“This would catalyse a rebound in charter rates, fleet utilisation, and contract awards. Earnings for O&G players are expected to improve from H2’22 onwards,” it added.

TA Research noted that the earnings expectations for the O&G sector from H2’21 until H1’22 are upstream contractors, shipping players, and petrochemical producers.

On crude palm oil (CPO), it said the average price for 2021 and 2022 would be firmer and higher than in 2020.

“We still hold the view that the global vegetable oil production will improve in the H2’21 and ease the pricing pressure. Subsequently, prices are expected to stabilise in 2022. When the Covid-19 pandemic wears off, the consumption of edible oil will resume and this would boost palm oil demand and support CPO prices,” it said.

On steel prices, it expects the average steel bar price to be supported at above RM2,400 a tonne level for 2021, backed by existing demand from the construction and property players and less intense price competition in Malaysia.

Meanwhile, its statistical study found that industrial and F&B players are the most susceptible to change in commodity prices.

“Although commodity cost-push pressure could lead to margin compression in 2021, we believe recovery in volume and demand could offset the cost pressure and result in earnings growth from 2020’s low base. Thereafter in 2022 when prices of commodities normalise owing to improved crop production, firms in the consumer sector are likely to be relieved from cost-push pressure and hence mark another year of earnings growth.

“Nevertheless, we do acknowledge the recovery in some sub-sectors could be protracted due to unfavourable movement control measures that are still in place and temporal shift of consumption and purchasing pattern,” it said.

https://www.thesundaily.my/business/commodity-play-picking-the-right-stocks-FK7873430