• Equities disappointed in 1H21. Malaysia stocks were generally lower following a sharp rise in Covid cases in 2Q21 that prompted yet another national lockdown. It is unclear when the current lockdown will end as the national recovery plan emphasises on significant reduction in daily Covid-19 cases and a high rate of vaccination. On YTD basis, Malaysia continued to underperform global stocks and some of regional markets such as Singapore and Thailand which have done much better in handling the pandemic.

• Malaysia’s recovery is facing its stiffest test. The rise in commodity prices has not translated into higher stock prices, which is a departure from previous post-recession occasions. Simultaneously, we have seen selected industrials, technology, plantation and banking registering improvement in yoy earnings amid the economic recovery. However, the rise in input costs in several sectors – due to supply chain pressure and higher commodity price – has been quite material and likely to affect companies’ profit margins during the remaining of 2021. This will add to the negative impact from lockdowns and a receding pent-up demand scenario.

• Institutional fund flows into stocksseeing a rare negative. As we enter the second half of the year, the V-shaped growth seen in early part of the year, ie exports and commodities, will likely diminish. Also, the current stricter MCO or full lockdowns will likely create a pushback on economic growth with impact likely to be seen in 2Q earnings. We could see continued weakness in stocks over the next 1-2 months until investors are convinced that the worst of Covid-19 is behind us. Contrary to our earlier assumption both local and foreign flows have been negative YTD, which is a rare occurrence.

• Several risks likely to play out in 2H21. We now predict the weak Malaysian stock market performance to persist for the remainder of the year and revised our KLCI target to 1,650 from 1,800 previously. It is likely that weaker corporate earnings growth, downside risk on external sector, slower GDP recovery, and prolonged lockdowns will impact performance of equities and fund flows. The Malaysian market has been too reliant on retail flows for the past 2 years and history suggests that this trend is unsustainable in propping up share prices. We are also adopting a new stance that a protracted uncertain political environment would risk the appropriate formulation and execution of long-term policies for Malaysia.

Source: BIMB Securities Research - 1 Jul 2021