The declaration of state of emergency provides a surprise respite, as Malaysia struggles with a rise in Covid-19 infection cases. With calls for fresh general elections having grown stronger from certain quarters, heighten political risk during the past 2 weeks is now allayed, in our view. As we had written in December’s report, we had rated the current government chance to last until the next general election as fair – delivering modest stability to the country from a political standpoint, emergency rule notwithstanding.

• Malaysian politics have never had a more tumultuous period since the general elections in May 2018 that witnessed the fall of the everpresent Barisan Nasional government. Since then the positions of the prime minister and governments have been under constant threats as politicians (elected MPs or members of parliament) manoeuvre for positions.
   
• Market dips due to politics have provided buying opportunities in 2020, including the previous failed state of emergency proposal in October and fear of budget 2021 non-approval.
   
• Fear and despair lead to attractive prices. Stocks have undergone a significant correction and consolidation with the KLCI declining by as much as 7% from its recent peak in mid-Dec.
   
• Key drivers remain constructive for stocks. Global trade has bottomed, while recent gains in commodity prices signalled a revival in demand that have resulted in structural upswing in CPO. Crude oil has risen to near 12-month high to USD57/bbl.
   
• Although there will be negative impact on GDP and corporate earnings from the current MCO/CMCO, we believe the track record of Malaysia’s health system in handling previous waves of Covid-19 last year, will avert a pandemic implosion. On the positive side, unlike the 2019’s nationwide MCO, economic sectors such as manufacturing and construction, are currently allowed to operate as usual.
   
• We retain a KLCI of 1,800 for 2021, an upside of 12% from the current level. We have been calling for investors to move into cyclical stocks, particularly in industrial and basic materials. We think the real action is likely to take place below the surface in mid-to-small capitalisation stocks, blending in to our main theme of early cycle recovery. Our high conviction buy call is Myeg (TP RM3.00) which falls in our theme of political stability as well as online transaction beneficiary as Malaysians stay at home. Our other key buys are TSH, Yinson, Inari, MPI, Padini, and GHL.

Source: BIMB Securities Research - 13 Jan 2021