• The 2020 Economic Stimulus Package, launched by PM Tun Dr Mahathir Mohamad on 27 Feb 2020, will serve as a soothing balm to the rakyat, businesses and the economy as a whole, that have been affected by the recent Covid-19 outbreak. The global epidemic has disrupted everyday life, human mobility, global supply chains, commerce and tourism.

• The rakyat from all walks of life including taxi drivers, tourist guides, medical personnel, immigration staff and Bantuan Sara Hidup (BSR) recipients will receive cash handouts, ranging from RM200 to RM600. The salaried workforce will enjoy a higher take-home pay with the temporary reduction in Employees Provident Fund (EPF) contribution to 7% from 10% for nine months from April to December 2020.

• Similarly, businesses are poised to gain from the stimulus measures. Hotels, travel agencies, airlines, shopping malls, convention and exhibition centres will be offered a 15% discount in monthly electricity bills for six months from April until September 2020, while at the same time, shopping malls are also encouraged to reduce rentals of their tenants.

• To relieve businesses from the credit crunch arising from an abrupt slowdown, Bank Negara Malaysia will provide a special relief facility worth RM2 billion, particularly in the form of working capital for SMEs at a lower interest rate of 3.75%. Bank Simpanan Nasional (BSN) will allocate RM200 million for its microcredit facility offering an interest rate of 4% to businesses affected by the outbreak.

• There are also measures targeted specifically at the tourism sector such as the deferment of monthly income tax instalment payment, double deduction on expenses incurred on approved tourism-related training, rebates on rental for premises at the airport as well as landing and parking charges, and exemption of the 6% service tax and Human Resource Development Fund (HRDF) levies. Meanwhile, smallish contractors will benefit from the RM2bil for the immediate implementation of small infrastructure repair and upgrading projects nationwide.

• We believe the stimulus package will help ease the pain caused by the Covid-19 outbreak. However, we are mindful of the other key event that is still weighing on the outlook of the FBM KLCI, i.e. the ongoing political impasse locally that will inevitably raise the market risk premium, hurting investors’ sentiment and could potentially even stall the public procurement system.

• We are looking to downgrade our end-2020 FBM KLCI target by 90–140pts to 1,530-1,580pts (from 1,670pts currently) to factor in: (1) a 1x multiple cut to 16.5x from 17.5x (0.5x each to reflect the negative impact from the Covid-19 outbreak and the political impasse); and (2) up to 3% downgrade in our 2020 FBM KLCI earnings forecast following the 4Q2019 reporting season (which should bring our 2020 FBM KLCI earnings growth to only 3–4% from 7.6% currently).

• In a brighter scenario where the Covid-19 outbreak and political impasse are to come to an end sooner than expected, we believe potential market rerating catalysts could come from investors’ revived appetite for risk assets, particularly, emerging market (EM) equities including Malaysian equities, conditional upon: (1) the US Fed is to maintain its narrative of not tightening monetary policy (which shall keep the dollar’s strength in check); (2) the sustained high equity valuations in developed markets (DM), prompting investors to look elsewhere for opportunities, including EM equities; and (3) the US-China trade tensions are to continue to ease.

Source: AmInvest Research - 27 Feb 2020