• We believe the concerns over the pandemic still persist as the Omicron variant continues to take the centre stage on the news media.
• Hence, we shall look for themes within the domestic driven economic activities which may bode well for telco, construction, building materials, consumer, automotive and healthcare sector.
• Meanwhile, we like export-related sector such as technology, plastic, plantations. We should avoid the aviation sector for now until further clarity is seen.
• There is a wild card in 2022 – the GE15, which the timing is unknown may pose some unwanted slowdown in trading activities.

Covid-19 Omicron variant

Prelim data suggests that it is mild… Although infectivity rate of Omicron is high, the symptoms are milder than the previous Covid-19 variants as hospitalisation and mortality rates are well contained, at least in the Malaysia’s context.

…but SOPs of breaking the chain are there to stay. However, some countries are banning international flights and upping the quarantining measures (SOPs) with the spiking Covid-19 cases. The downside risk may occur should this variant cause another full lockdown, but in our view it is less likely for now.

Booster shots will be needed going forward. Malaysia has achieved 78.5% fully vaccinated for the population, while 20.3% has given a booster shot for now. This should be able to slow down the infectivity of Covid-19 virus. Over the past two weeks, we have seen declining trend in hospitalisation, ICU and death rates.

Malaysia’s situation picking up. Since the reopening of our economy after the MCO3.0 last quarter, overall business sentiment has been improving and most of the shopping malls and tourist spots as well as expressways are getting packed.

The mobility trends reports are suggesting that the mass population are heading out and spending more time driving and walking as compared to during MCO period.

Economic review and outlook

Stimulus packages during Covid-19 period have contributed to the inflation. The US President Joe Biden has signed an USD1.9 trillion worth of stimulus package to assist and provide critical aid to workers and businesses that are affected by the Covid-19 pandemic. However, some are observing that the stimulus package is contributing to the spike in prices and fuelling the recent inflationary pressure.

The Federal Reserve is turning more hawkish. In the recent FOMC meeting, the Fed has acknowledged the inflation situation is not “transitory” and provided a more hawkish statement. The Fed is expected to ramp up the tapering process into 2022 and most of the Fed’s officials are anticipating at least 3 interest rate hikes in 2022.

Domestic driven activities and exports to be focused. Closer to home, the international borders are not fully reopening yet amid uncertain Covid-19 situation following the emergence of Omicron cases. Hence, we are likely to notice the uneven growth rate between various sectors going forward. Malaysia will still rely on exports and domestic economic activities, while growth in aviation and tourism sectors may propel once the travel borders are reinstated.

GDP to grow at positive rate. In 2020, Malaysia’s GDP contracted -5.6% YoY. Based on Bloomberg consensus, Malaysia’s 2021-2022 GDP is projected to grow at a rate 3.5% and 5.7%, respectively. Meanwhile, MOF projects Malaysia’s 2022 GDP to grow at 5.5-6.5% in 2022.

Market review and outlook

Global markets trading at a premium, but the local market is still at a discount. The MSCI World Index and S&P500 are trading at 23.2x and 26.3x vs. 10Y avg PE of 20.0x and 19.9x, respectively, while the FBM KLCI is trading at 15.3x PE (10Y avg PE of 17.7x).

Overall trading activities have slowed down… The YTD average daily trading value (ADTV) has dropped 15.7% to RM3.54bn in 2021 (2020: RM4.2bn). The decline was obvious during the 4Q21 after the share trading stamp duty changes in the Budget 2022; 4Q21 ADTV stood at RM2.53bn. Meanwhile, we noticed that the foreign investors has changed their stance from net selling of -RM4.2bn in the 1H21 to net buying of RM1.05bn in 2H21.

…but expect trading activities to return. Both the Bursa and MOF have come to a common ground to reinstate the stamp duty to be capped at RM1,000 until 2026 2026. With this move, we expect the ADTV to at least improve in 2022.

1Q22 Strategy – Drifting in an uneven recovery path

Omicron variant likely to be the end of the pandemic. Most of the patients are having mild symptoms after contracted with Covid-19 Omicron variant, should it hit the mass population and recovers, which may act as a protection to the rest of the population. Hence, many viewed it as an ending to the pandemic. Certainly, the downside risk will be emergence of another Variant of Concerns.

Not all sectors are reopened. As of this juncture, the whole economy is struggling to recover as not all sectors are in their usual growth rate. For instance, domestic economy will restart as soon as MCO is lifted, while aviation and tourism sector may pick up in latter part. For now, domestic travellers will fill the void.

Domestic driven catalysts will be crucial in 2022. While we await international travellers to return next year, we may rely on the domestic economy to drive the growth at least for the start. We believe construction, manufacturing, building materials sectors will be expected to run at their max capacity going forward.

Telco to go hand in hand… The ongoing 5G theme will continue to generate trading interest in the market following the announcement of Digital Transformation Plan under Budget 2022. RM15.0bn is allocated for the 5G rollout that will provide coverage in high density areas including Johor, Selangor Penang, Sabah and Sarawak, while RM28.0bn is allocated for the JENDELA initiative to increase 4G coverage from 91.8% to 96.9%; that should keep telco services providers busy throughout the year.

…with technology sector. The technology sector was largely boosted by the rapid development and rising adoption in 5G and IoT devices as well as the technological advancement in Artificial Intelligence, digitalisation and automation efforts in corporates. Meanwhile, the electric vehicles segment will remain as a decent catalyst in 2022 and is likely to boost demand for chips. We foresee that the technology sector outlook to remain positive with most of the semiconductor players ramping up their production capacity and global semiconductor sales to reach USD600.0bn by 2025 (according to research firm IDC) .

Consumer sector to see improvement. We believe the revenge spending is a catalyst and business sentiment should pick up in 2022 after a long winter during 2020-2021. However, products and services prices might be increasing on the back of inflation following the Covid-19 environment. Certain consumer may switch the buying behaviour to online shopping, while shopping mall footfall should increase after MCO.

Automotive sector may gain traction in 2022. The reopening of automotive showrooms after the MCO was lifted in 2H21 should boost the automotive sales and we expect the sales tax exemption on passenger vehicles and various incentives for the EV ownership announced in Budget 2022 will drive the growth. These factors should support the demand for hire purchase segment as well.

Plastic demand to stay elevated. During Covid-19 year, plastic usage has been rising amid hygiene concerns translating to higher usage across various industries. In view of the recent decline in resin prices, which may translate to lower raw material cost for the plastic manufacturers and in turn should increase margins going forward.

Construction sector to return under the limelight. The sector was beaten down badly during lockdowns, but we believe the construction players will be playing a catch-up with the completion of the projects in hand. The key challenges are the rising raw material costs and slowdown in awards of public mega infra projects. The focus at this point is the Pan Borneo Highway (Sabah portion), ECRL, KVMRT2 and Central Spine Road.

Plantation sector to reap the most from the upbeat CPO prices. CPO price has been elevated in 2021 (avg: RM4,133/MT) and should maintain firm averaging around RM4,000/MT in 2022 on the back of (i) sustainable demand from India and China, tagging the economic recovery theme and the (ii) La Nina occurrence.

Glove sector may still be attractive as a balance sheet swelled. Despite the share prices falling from the peak and trading nearer to the pre-pandemic regions, the sector’s balance sheet has grown tremendously, benefited from the surge in demand for gloves during Covid-19 pandemic. With that, investors may look at it as a dividend sector, rather than an exponential growing sector as the ASP for gloves has tumbled due to normalize demand and rising gloves supply from new entrants.

The Wild Card – GE15. The 15th General Election is scheduled to be held on or before July 2023 or in two months’ time to elect the members of the Dewan Rakyat in the 15th Parliament of Malaysia. This may give rise to the volatility in the stock markets. Based on both the recent Melaka and Sarawak state elections, the majority of the seats are won by Perikatan Nasional and its alliances, while oppositions are getting lesser seats. Based on that direction, market players may use this as an indication to position themselves in the local stock exchange.

Sector and stock picks for 2Q21

• Building Materials: OKA, OMH
• Construction: AME, JAKS
• Consumer: RGTECH5G-related: BINACOM, OCK, OPCOM, THETA
• Healthcare: OPTIMAX, SCOMNET
• Plastic/ paper packaging: BPPLAS
• Technology: FRONTKN, GREATEC, KGB, KRONO
• Plantation: KMLOONG
• Hire Purchase: ELKDESA

Source: Mplus Research - 5 Jan 2022