• KLCI closed lower as global stocks ended mixed. Malaysian market fell for another week primarily on concerns of Covid-19 on the economy. The KLCI closed at 1,531 points and is currently approx. 10 points above its year-low recorded on 3 February. Foreign participation returned to net outflow of RM448m – versus a net inflow RM71m the previous week – raising YTD outflow to RM843m. Retail investors continued to remain net buyers last week (+RM172m), pushing total YTD net buying at RM726m, while local institutions accumulated buying stood at RM117m.
• Malaysian ringgit fell to lowest in 3 months. The ringgit fell by nearly 2% last week at RM4.19 against USD. The decline in ringgit was driven by market’s expectations for another OPR rate cut in March and flight to safe haven currency, ie the USD, in our view. Year-to-date ringgit performance is -2.4%, while the Thai baht (-5.9%) and Singapore dollar (-3.8%) have seen steeper fall during the same period (refer chart 1). Monetary policy has been cut loose further, with the Bank of Thailand cutting rates by 25bps on 5 Feb and Bank Indonesia by the same quantum on Friday. Malaysia’s key 10-year MGS stayed at 2.91%, firmly below the 3% level since the past 2 weeks.
• Uncertainties gradually raising market risk premium. With Singapore and Japan on the brink of a recession, the risk of other Asian countries facing a sharp slowdown has elevated in recent weeks. This came as growth already moderated in 4Q19, and likely to be hit with supply chain disruptions and weak tourism in 1Q20. Further, we see the impending political changes in Malaysia as risk, albeit short-term, as the KLCI has already been underperforming regional stocks the past 20 months.
• We remained stock-specific in our recommendation. We continue to favour high-yield, consumer staples and possible domestic/fiscal-oriented sectors such as construction and selected oil & gas. We expect investors to remain risk-averse on local stocks, particularly on large-cap stocks in banking that are susceptible to earnings downgrades. To-date, 10 KLCI companies have released their earnings (Dialog, Top Glove, Hartalega, IOI, KLK, Digi, Maxis, PetGas, MISC and Axiata), mostly within expectations. As at January 2020, the KLCI is estimated to see earnings growth of 5.9% yoy, which we think will likely see changes post-February 2020 earnings season.

Covid-19 threat and impact on Malaysia’s tourism

The Covid-19 epidemic has now spread to several countries outside China. The outbreak will economically impact certain sectors, and Malaysia’s services sector could probably see the biggest hit. For now, tourism industry players estimated loss of businesses of RM6bn which prompted the Malaysian Association of Tour and Travel Agents recently stating that 95,000 hotel rooms have been cancelled due to Covid-19 concerns.

The Malaysian government targeted the Visit Malaysia Year 2020 to attract 30m tourists and tourist receipts to reach RM100bn this year, compared to target of 28m tourists and RM92bn receipt for 2019. During the SARS outbreak, tourist arrivals in Malaysia from China fell by 37% while tourist arrivals generally fell 21%, leading to a decline of 39% and 17% in tourist spending. Meanwhile, several retail associations indicated that sales have fallen by as high as 50% and expected to drop further over the next 3 months.

Source: BIMB Securities Research - 24 Feb 2020