• KLCI is officially in bear market. Malaysian market fell more than 4% in February as Covid-19 fears on the global economy elevate. The KLCI at 1,482 is approx. 22% lower than its April 2018’s record high of 1,895, thus meeting bear market definition of falling by more than 20%. A net outflow of RM2.1bn for the year contributed to the decline as the market hangs on to retail investors’ buying. Meanwhile, US stocks suffered their worst weekly decline in over a decade as investors reacted to the global spread of the COVID-19 outbreak – the S&P 500 is down >10% YTD, but is still positive on a one year horizon.

• Expect sluggish KLCI earnings as banks are downgraded. The February reporting season saw banks earnings coming in in-line with estimates. As earnings as backward looking, the cut in OPR and expected further cut, plus weak loan demand will likely squeeze banks’ net margins this year. We expect to see banks earnings downgrade to become more visible as we move into 2Q20, as the slowing economic growth indicates hint of potential decline in rates, in our view. Moreover, there is a growing view that Malaysia’s OPR will be reduced by the next MPC meeting on Tuesday.

• Politics and government – investors eschew rhetoric and look for visible directions. The latest political plot with a new PM and new government sworn in may not bode well for market’s sentiment in the short-term. Investors will likely assess the implication of a new coalition in power which include new policies, directions and commitment to reforms, as campaigned by the previous PH government that helped swept it into power during the 2018 general elections – garnering majority votes in the process.

• No reprieve in sight. We expect Malaysia’s risk premium to stay elevated as Covid-19 impact and new government’s ability – and credibility – to manage the country under the current extremely challenging economic condition is assessed and scrutinized by investors. With official economic growth tempered to a low of 3.2% for this year, we estimate KLCI aggregate earnings to decline from 5.9% post-February to 1-2% yoy as we tabulate the impact of slower banking growth. We expect compression in both earnings and PE multiple this year and hence further revise our year-end KLCI target to 1,550 (implied KLCI earnings growth = zero, implied PE = 15.5x), down from previous 1,650 (+3% growth, PE of 16x).

Economic outlook gloomier as rates decline

For the month of February, foreign participation in Malaysian market saw an overwhelming net outflow of nearly RM2bn (refer Table 4) versus only RM138m in net outflow in January. This brings YTD net outflow of RM2.1bn, compared to net buying of RM1.4bn and RM670m for retail and local institutions respectively. Not surprisingly, the KLCI fell more than 4% in February and almost 7% YTD, tracking the losses of global stocks.

Central banks across the region have almost unanimously reduced official interest rates as GDP growth slows. Singapore runs the risk of entering a recession as growth is estimated at 0.5% while Thailand has moderated its GDP forecast to 1.5-2.5% for 2020. We think there is a high chance that Malaysia’s OPR could decline further during and this could happen as early as March. Growth expectations this year have been tempered, as government forecast now sees a range of 3.2%- 4.2% versus 4.8% previously. The RM20bn stimulus package announced last week is designed to assist SMEs in sustaining their cashflows and put extra cash into consumers’ hand.

The KLCI fell when PH swept into power post-GE14

The risks to the stimulus package are the Covid-19 deteriorating beyond 1Q20 and execution by the new Malaysian government. We may see risk of GLCs going for another round of leadership changes as seen during PH’s early months in power. Overall, there may be uncertainties surrounding stability and policies. Recall that the KLCI fell by 11% within 2 months of GE14 when the new PH was appointed as new government.

Source: BIMB Securities Research - 2 Mar 2020