• KLCI claw back losses on monetary stimulus. Malaysian market fell sharply last week as imposition of Movement Control Order (MCO) on Wednesday triggered heavy selling that saw the KLCI falling near the 1,200 level, before closing at 1,303 – down 41 points from a week ago. The index nonetheless, rose sharply on Friday as BNM cut SRR and central banks continued to reduce interest rates or launch bond buying program. Total foreign selling persisted at a staggering RM1.8bn, rising to a cumulative net outflow of RM4.9bn the past 3 weeks. On a regional basis the KLCI remains an outperformer down by 15% the past month, as opposed to Thailand (-24.6%), Indonesia (-28.7%) and Singapore (-24.2%) all of which closely tracking the performance of MSCI EM (- 25.9%).

• MCO to stave off coronavirus, as countries imposed strict measures. Malaysia implemented the MCO beginning Wednesday until 31 March as the government took the fight against Covid 19 more aggressively amid rapid increase in the number of cases. Indeed, people infected have surpassed 1,000 and it does not appear at this point that the curve would flatten soon. On the positive side, Malaysia’s medical facilities have near-1,000 ICU ventilators to cope with rising number of infections. More countries have taken similar restrictions on movements as the pandemic impact rose relentlessly.

• Coming economic data will show extent of impact. Yield rose during the week as investors sold off bonds, which saw the 10- year MGS up sharply to approx. 3.6% from a low of 2.8% level. The selling in MGS tracks a stronger USD/MYR rate at approx. RM4.40. This is also in tandem with the trend of 10-year UST that closed the week at 0.9% – well off its record low yield of 0.4%, as bond buying programs and USD swap lines were enhanced. Stocks and yields are vulnerable to economic data that will be released now until May, which will capture the extent of Covid-related damage, in our view.

• Work-from-home era is upon us. As presented in our note the past weeks, the impact of an economic shock could be a drawn out affair for financial markets as seen in 2008-09 and 1997- 98. The 2 previous recessions were due to excesses in balance sheets, whilst the next global recession is due to issue of “life and death” that could permanently alter social behaviour and have deeper ramification to economies. We think equities will likely remain volatile as impact of this pandemic is gradually assessed.

Commodity and yield rout does not suggest bottoming out yet

Brent crude oil reached a nadir of USD24 per barrel before recovering to USD28 last week. Brent crude oil pricing has entered our “possible deterioration” scenario which we presented in our report last Monday. The impact on the sector – and Malaysian oil-related equities (PetChem, Yinson, Hibiscus) – would be enormous if this pricing level is to prolong as summarised below.

• Average oil price of USD20-30/bbl within next 6 months.

• US shale player maintains production as a result of sector consolidation and/or prolonged Covid-19 impact which may lead to a recession.

• This will lead to the expectation that the oil market will be set for a lower for longer scenario.

• NOCs, too, may announce immediate spending cut to preserve capital

• This leads to another round of downcycle in offshore capex

• Asset utilisation rate will be lower followed by lower dayrate for service companies.

Meanwhile the 10-year MGS yield rose sharply last week as seen in Chart 2 below. We think recent market distortions have made the yield on MGS becoming erratic the past few weeks. The MCO implementation, the weakness of the ringgit against the USD, the crash in Brent crude oil price, and economic impact from virus, have all combined to contribute to the substantial selling in Malaysian bonds. We would be monitoring the yield closely in the next few weeks.

Source: BIMB Securities Research - 23 Mar 2020