With the onslaught of Covid-19, we cut 2020 GDP to -2.0% (from +2.3%) and maintain our expectations for another -50bps OPR cut this year to 2.0%. Covid- 19 aside, low oil price (hitting fiscal, ringgit and market) and possible political uncertainty resurfacing are key headwinds for 2Q. We feel the recent rebound is a “dead cat bounce” and a W-shaped trajectory is likely with a bottom KLCI estimate of 1,089 to 1,029. Year-end KLCI target of 1,350 is based on 14.6x PE (GFC mean) tagged to mid-2021 EPS. That said, we would only turn buyers at levels closer to our KLCI bottom estimate.

The peak is nigh. Malaysia has reported a total of 2,470 Covid-19 cases as of 29 Mar. We reckon that daily new cases in Malaysia could see its peak in the 1st week of Apr and subside to more containable levels by 1st week May. This is based on studying the “bell curves” of China and to a lesser extent, Italy. However, predicting the global Covid-19 trajectory is more uncertain; while China has improved, the situation has worsened in Europe and US.

Hard to avoid the “R-word”. Given the onslaught of Covid-19, IMF predicts a global recession in 2020 to be at least as bad as the GFC (2009: -0.1% YoY), but expects a recovery in 2021. As an open economy, coupled with the MCO, Malaysia will not be spared. We have cut our 2020 GDP forecast from +2.3% to -2.0%. While the RM250bn PRIHATIN stimulus is timely, we feel this only serves to cushion the downfall but not prevent it. We project private consumption to slow significantly to +0.5% in 2020 (2019: +7.6%), mirroring GFC level (2009: +0.6%). Our 2020 inflation forecast now stands at +0.5% (from 1.7%; 2019: +0.7%). Alongside negative growth, we maintain our expectations for another -50bps OPR cut in 2020 to 2.0%.

Headwinds to persist. Currency adjusted, KLCI has fallen -21% YTD (painful, yes) but still better than ASEAN-5’s -30.8%. Without sugar coating, we believe the headwinds seen in 1Q will persist into 2Q as well. While we are hopeful for Covid-19 to reduce to containable levels in May, its impact for 2Q will still be profound as the MCO has been extended 2 weeks into Apr while global containment still seems distant. Low oil prices will hit Malaysia on several fronts: (i) budget; MoF’s -4.0% deficit target seems like a tall order, (ii) weak ringgit (81% correlation), (iii) possible cut in Petronas capex and (iv) KLCI tends to have a higher correlation to oil price when the latter is falling. Lastly, while domestic politics has quieted, uncertainty could still resurface once Parliament reconvenes on 18 May.

W-shaped trajectory? Since its recent low of 1,220 (19 Mar), KLCI has rebounded by as much as 10% (27 Mar). Past bear markets have shown that it is not uncommon to see a “dead cat bounce” with magnitudes ranging 10-13%. We are inclined to believe the market will have a W-shaped trajectory and we are probably now at the first half of that W. Based on the GFC experience, our guesstimate of the KLCI’s bottom ranges from 1,089 to 1,029.

Maintain KLCI target of 1,350. We now forecast KLCI earnings to contract for the 3rd consecutive year in 2020 by -3.9% but rebound +7.7% in 2021 (recovery amid a low base). Our year-end KLCI target of 1,350 is based on 14.6x PE (2008-2009 GFC mean) tagged to mid-2021 EPS (reflecting both Covid-19 and eventual recovery). That said, we would only turn buyers at levels closer to our KLCI bottom estimate. Our top picks are those that have a relatively more resilient business nature/ strong balance sheet to weather the storm (Tenaga, Sunway, TIME, KPJ, Axis and MBM), high divvy yielders with reasonable certainty (BAT, HSI) and beneficiaries from Covid- 19: Top Glove (direct) and Bursa (circumstantial).

Source: Hong Leong Investment Bank Research - 31 Mar 2020