Exclusive – Flexible trading caps

malaysia news lab

PETALING JAYA: There has been a change in how some brokerage houses are viewing the risks that are associated with rubber glove and healthcare stocks.

Some of the brokerages have considered that the earlier market caps that have been put on the group of stocks have become irrelevant and have removed them.

This is because risk management has improved and most retailers that are buying into the stocks have been paying for them in cash.

There are, however, other brokers that have limits on facilities that are used for the purchase of glove and healthcare stocks. The caps vary from one broker to another.

The caps apply to either the share price of glove stocks or the margin allowed for the counters.

“Most are buying into such stocks without the use of margin facilities. When this happens, the earlier objective of the market cap is now deemed not relevant, ” said a source.

“The risk management has improved somewhat as most are paying for their stock purchases in cash. Since the risk management is strong there would be no need for market caps, ” the source added.

StarBiz reported in June that brokerages had become uneasy over the stratospheric rise in the share prices of rubber glove companies and put a cap on how much traders can borrow if they use the counters as collaterals.

It was reported that Bursa Malaysia observed that it has not seen the usual growth in margin financing for shares this time around.

The bull run is being financed by cash due to a reallocation from term deposits, which are now giving a lower rate of return due to the dip in interest rates this year, according to the stock exchange operator.

“Lower interest fixed deposit rates have released new liquidity into the market, ” Bursa Malaysia CEO Datuk Muhamad Umar Swift reportedly said.

Brokerages have recently become cautious over the share price rise in rubber glove and the associated healthcare stocks due to the high valuations.

“I think the brokers have to thread cautiously because while research arms are putting high target prices on the rubber glove stocks, the brokerages also have to contend with the risk should the stocks suddenly start to fall, ” said a market observer.

Recent trading activity has seen a strong influence of rubber glove stocks on overall local market sentiment and direction as they are constituents of the benchmark FBM KLCI.

They included Top Glove Corp Bhd and Hartalega Holdings Bhd that have seen heavy profit-taking activity.

It was reported that Top Glove and Hartalega were the two counters that had propped up the FBM KLCI especially during the pandemic, without which the index would be roughly 200 points lower.

The positive developments associated with a possible Covid-19 vaccine have removed some support off the rubber glove and healthcare stocks rally.

There were also reports of a potential windfall tax on some of the rubber glove and healthcare companies, which would also increase the trading risks on such counters.

“Based on what happened in industries such as palm oil which had seen additional taxes when crude palm oil prices shot up, I think it is a reasonable assumption that the government will announce a windfall tax on the rubber glove players. Bear in mind that budgets are tight as the economy continues to be impacted by the pandemic, ” said a market observer.

Despite their meteoric rise, research houses are still mostly bullish on the rubber glove and healthcare counters.

CGS-CIMB, in a report, said it was still upbeat on the rubber glove counters.

“We gather that glove makers’ order book visibility remains strong until the first half of next year and average selling prices (ASPs) have continued to increase in the near term, ” the research house said in a report on Wednesday.

“We understand that most of the glove makers are still increasing their ASPs on a monthly basis due to favourable demand-supply dynamics. Therefore, we believe the increased demand and ASP hikes should lead to sequentially stronger results for all the glove makers, ” it added.

CGS-CIMB had retained its overweight call on the industry with add calls on Top Glove (target price RM29.30), Hartalega (RM24.30) and Supermax Corp Bhd (RM27).–The Star

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