• Global stocks in unison bear market. Global stocks were officially in bear market last week led by the US which experienced a swift 20% drop from its record high. Malaysia’s KLCI slumped to 1,344 points and by 13% in last 4 weeks led by a staggering RM1.9bn net outflow. Total cumulative net outflow for the last 2 weeks rose to RM3.1bn, causing the index to fall close to 30% from its record high of 1,895 set in 2018. On a regional basis the KLCI is an outperformer however, as Thailand Indonesia and Singapore fell sharply lower, closely tracking the performance of MSCI EM.

• The world grapples to contend with the Coronavirus. Countries from the US to Europe and Asia imposed measures, including travel bans, restrictions on gatherings, and closures of schools, universities, restaurants, and bars, whilst Italy’s entire population is under a lockdown. At the moment, economic data is not fully capturing the outbreak’s effects, as the full impact will be felt in March 2020’s data for most countries affected by the virus, in our view. China will release industrial output, investment and retail sales on Monday, which are forecast to show an across-the-board contraction for the first time on record. China’s official PMI has already fallen to a record low of 35.7 in February from 50.0 in January.
• Recession is now inevitable. The Government last week estimated Malaysia's GDP to have contracted between 0.8% and 1.2%, or between RM10.8bn and RM17.3bn for January and February 2020. This confirms the general belief, drawn from Coronavirus-related fears, that economic activity has indeed been stifled since January. We now expect OPR cut is more likely before May with the US and global central banks undertaking coordinated moves.
• Markets may rebound out of hope, but worse may yet to come. Malaysia recorded its worst one-day outbreak over the weekend, raising the number to 428 – the highest cases among ASEAN. We think this could impact market sentiment as consumers turned increasingly cautious on spending. Secondly, there is little evidence to suggest that the Coronavirus outbreak could have reached its peak soon and if this pandemic would end by summer. Moreover, history suggests that the impact of an economic shock could be a drawn out affair for financial markets as seen in 2008-2009. The S&P500 found a bottom at -58% in 6 months, while the fell KLCI by 47% in 10 months.

Source: BIMB Securities Research - 16 Mar 2020