As if crumbling asset markets didn’t already have enough to worry about, World Bank President David Malpass twisted the figurative knife by stating a “perfect storm” of challenges (i.e. rising interest rates, high inflation, and synchronised growth deceleration in the US, China, and the EU) could reverse years of economic development and raised the specter of a prolonged period of stagflation, a period of low growth and high inflation last experienced in the late-70s.
In a stagflation scenario, management teams will need to defend margins and cashflows in real terms via a combination of cutting operating expenses and adroitly pass-on cost pressures to customers such that volume sales downside is minimised. The latter, especially in a domestic context where mass-layoffs are not the norm, is most easily achieved by corporates that are operating in sectors where demand is relatively inelastic, with additional supporting factors being strong branding and weak competition. Throw in heightened balance sheet stresses relating to working capital/payment cycle management (i.e. crucial to keep inventory lean and being paid early) and its clear stagflation is not a time for investors to give weak/opaque management teams and vulnerable businesses the benefit of the doubt.
MI Bank’s views sectors where consumer spending cuts are least likely and with pricing power include Utilities (Gas(M), Telekom, Axiata, Cypark), Consumer Staples/Downtrading (MR.DIY, Farm Fresh, BFood), Healthcare (KPJ), and dominant Software (CTOS)
ESG Champions: the weight of evidence, as also underscored by MIBG’s “Malaysia ESG Portfolio Refresh” report, dated Sept 27, indicates companies with strong Sustainability practices have better operational performance given more rigorous assessments of business models and long-term strategic thinking/planning (key traits for navigating stagflation). Maybank Investment Banking Group” or “Maybank IBG’s 15-stock MY ESG Portfolio comprises PChem, HLBK, DiGi, RHB, Westports, Inari, Sunway, Yinson, Bursa, Axis, Bermaz, MISC, Telekom, Gamuda, ViTrox.
