• Stocks rose with renewed vigour. The stock market remained upbeat last week as the KLCI rose to close above the 1,400 level. A combination of buying by both local funds and retail investors lifted healthcare stocks and mid to small cap stocks. As banking stocks remained sluggish, the “new world” stocks of healthcare took centre stage, also helping the Hijrah Shariah Index to scale closer to a Vrecovery (Table 1). Net foreign selling continued its trend, currently at a substantial RM12bn YTD, eclipsing 2019’s entire RM11bn of outflow.
• Malaysia’s 1Q GDP surprised on the upside. The 1Q GDP of +0.7% yoy provided relief for the market as consensus had expected a contraction due to Covid-19 pressure. Negative GDP for 2Q is imminent reflecting the longer duration of lockdown measures both globally and domestically. BNM expects with easing of restriction measures, i.e MCO lifted, economic activity is expected to gradually improve in 2H20, aided by "sizeable fiscal, monetary and financial measures and progress in transport-related public infrastructure projects.”

• “New world” dawning. The stock market has been reinvigorated by local investors, pushing up Bursa’s volume to record levels. As highlighted previously, retail investors have been net buyers since 2H18 which continued into 2019. With super low real rates, weak property market, and ample time, money has found its way into the stock market. Healthcare, IT, digital, consumer, telco, including quality companies, are being looked at differently as they spearhead a “new world” – health, WFH, broadband, cashless, on-line purchases. Unlike a typical financial crisis, the Covid-19 pandemic offers opportunities for companies, due to changes made to how we live and work.

• Economic rebound seen next year, 2020 is a “lost” year. The stock market suffered significant sell-off in March due to expected sharp contraction in global economy in 1Q and 2Q. Additionally, lockdowns and rising Covid-19 infections had reduced economic visibility substantially. The situation has materially changed in April as countries began planning to open up economies and businesses. The base case is for a rebound in 2H20, with sharp recovery projected for 2021. We see new leaderships in healthcare, telcos, consumer as an encouraging trend for the market, taking up the slack in weak banking stocks’ performance this year, in our opinion.

Local buying offset net foreign outflow – “new world” unmasked 

We retain our view, predicting the KLCI to rise to 1,500 points by the of the year, valuing the index at P/B of 1.5x and PE of 15x on next year’s earnings. The market as reflected by the KLCI has declined by 37% from its record high of Apr 2018, whilst the Covid-19 accelerated the decline this year to a low of 1,207 in March. The KLCI has since recovered by 16% from the year’s low, powered by healthcare stocks of Hartalega and Top Glove, as well several telco stocks. The KLCI is still down by 12% YTD, but the Hijrah Shariah Index is only -4% for the year due to the absence of banks.

Source: BIMB Securities Research - 18 May 2020