• Although economy is likely to contract in 2020, we think several stimulus measures across the globe should be able to cushion the downside risk and market players are expecting a recovery in 2021; similar case for Malaysia.
• For local exchange, we opine the trading activities will hover around gloves and related proxies and healthcare stocks without any meaningful drop in Covid-19 cases. Besides, trade diversions and trade catalyst should turn out well for 4Q20.
• We have picked CAREPLS, ESCERAM, DNONCE, PECCA, TOMYPAK, AME, WEGMANS and BURSA for this quarter.

Economic review and outlook

• Winter is coming - unchanged narrative on Covid-19 situation. Since Covid-19 outbreak early this year, the confirmed cases have not been subsiding. Furthermore, some countries have gone into second wave, which translates to second round of lockdowns or curfew mode; i.e. in Europe and UK. For short- to mid-term, we believe this situation could pressure business activities and economy could remain tepid for another quarter before we can see a meaningful recovery moving forward.

• Contraction phase for economy in 2020… Based on Bloomberg consensus, the World GDP is likely to decline -3.9% (vs. -3.8% on 14th Aug) before recovering 5.2% (vs. 5.10% on 14th Aug) in 2021. Meanwhile, Malaysian economy could decline -4.7% in 2020 before recovering by 6.0% in 2021. Also, World Bank has downgraded Malaysia’s GDP growth outlook to by -4.9% (vs. previous forecast of -3.1%) for 2020.

• …and low interest rate environment to persist. As the Covid-19 pandemic has translated to sluggish business environment following lockdowns in several countries across the globe, the Federal Reserve’s tone has turned dovish with the interest rate path to be kept near the 0-0.25% range at least until 2023.

• Meaningful recovery may only be seen in 2021. The Covid-19 confirmed cases are still on the rise, coupled with the work-in-progress vaccine globally, we believe economic activities (i.e. tourism, aviation, and etc…) could stay soft at least for the rest of the year. Hence, breaking the Covid-19 chain and positive developments of an effective vaccine will be crucial for a meaningful economic recovery moving forward. Nevertheless, we believe the several stimulus measures that have been implemented by most of the countries during this year could cushion the downside risk at least for now.

Market review and outlook

• Market getting toppish after V-shape recovery in 1H20… Global markets have recovered since mid-Mar, which was contributed by the unlimited liquidity injection and dovish stance by the Federal Reserve until 2023 and similar actions by global central bankers. However, market is fairly toppish at this juncture as the MSCI World Index and S&P500 are trading at 28.7x and 26.0x vs. 10Y average PE of 18.3x and 18.2x, respectively, while FBM KLCI is trading at 22.1x PE vs. 10Y average PE of 17.4x. We think it has reached the equilibrium (at least for the near term) and we may need stronger catalysts to move the markets higher from this point.

• …and investors are looking beyond 2020. Malaysia has gone through a tough period in 1H20 after the Covid-19 pandemic outbreak and all the SOP-induced behaviours (i.e. social distancing, wearing of face mask, avoiding crowded places) as well as the travel restrictions may pose downside risk to our economy. However, we are still hopeful to have a recovery in 2021 (provided there is no further MCO throughout the whole country) as our Covid-19 situation are being contained more effectively within the ASEAN region and the reopening of business activities since CMCO and RMCO period should be able to limit the downside risk for 2020.

• Heightened volatility amid the recent political developments… Meanwhile, the recent political developments may give rise to some volatility in the stock market as we have observed during the change in administration in 1Q20. Market went into a knee-jerk selling mode and selected technology, construction and politically linked counters being sold down furiously; selected counters have recovered since then.

• …resulted in further outflow of foreign funds. As at 30th September 2020, foreign net outflow stood at RM22.3bn (2015: oil crisis foreign outflow was c.RM19.5bn).

• Brent oil down… For Brent oil, it has not been a good year since the Covid-19 outbreak, contributing to the weaker demand globally amid lockdown restrictions in the US and Europe, coupled with the resurgence of Covid-19 cases as well as trade tensions between China and the US. The crude oil price remained below the recent resistance of USD46.5 (traded to the lowest point near USD15.98 level in Apr-20).

• …but palm oil up. Meanwhile, after the CPO hitting the RM1,939 (May-20) it has recovered swiftly towards RM3,104 (Sep-20) recently on the back of the resumption of demand seen from major consumers, including China and India. Also, the potential of La Nina hitting in the second half is likely to dampen any prospects of increase in production, which may support the CPO price at least towards year end.

• Winners and losers. In 3Q20, there are only few winning sectors, led by Healthcare 59%, followed by Technology 34% and Plantation stocks 5%. For the laggards, we have Construction index, REITs and Energy index fell 5% each.

Source: Mplus Research - 6 Oct 2020