We reckon that BNM is comfortable with the current record low OPR (1.75%) and expect this to be maintained into 2021. 2Q20 was likely the trough and a recovery should ensue with 2H20 GDP of -1.7% vs 1H’s -8.2%. Although Covid- 19 cases have seen resurgence, we reckon a 2nd lockdown will likely be an action of last resort. We argue that “retail liquidity” will more likely normalise gradually rather than swiftly evaporate, while decade low foreign shareholding is at a more palatable base to envision the latter’s re-entry. With grapevine talk on snap polls, Budget 2021 (6 Nov) could very well be an “Election Budget”. Our 12M KLCI target stands at 1,580 (17.7x CY21 EPS).

Lower for longer. With new daily Covid-19 cases showing no signs of abating, this will continue to exert downside risk to the global economy. A fractured US Presidential Election (6 Nov), potential decisions to reverse re-openings (e.g. in Europe) and Brexit challenges may also pose further headwinds. Given such, global central banks (including Fed and ECB) are expected to remain expansionary. To recap, during the GFC, it took the Fed 7 years to begin its policy normalisation process. Domestically, we reckon that BNM is comfortable with the current record low OPR at 1.75% and expect this to be maintained into 2021.

Out of the trough but not the woods. With the full brunt of MCO, 2Q20 was likely the trough for both GDP (-17.1%) and corporate earnings (1H20 HLIB universe: -46% YoY). We project 2H20 GDP to chalk -1.7%, recovering from 1H20’s -8.2%. Consumption indicators have shown encouraging recovery signs; CSI has rebounded, retail sales are recovering, domestic credit card spend is almost back to pre-MCO days and auto sales have reverted to its normalised range. Still, the recent rising new daily Covid-19 cases domestically pose the largest threat. In this regard, we feel that a 2nd round of lockdown will be an action of last resort, and if so, possibly on a targeted approach rather than nationwide.

Liquidity factors. We don’t think that the automatic loan moratorium ending will cause “retail liquidity” to swiftly evaporate, but rather, gradually normalise to levels that is still higher than its historical average (say, low-30% vs 10Y mean: 24%). Why? (i) FD rates are low, (ii) deposit and loan repayment trends suggest that “moratorium money” wasn’t significant in driving retail inflows to begin with and (iii) gloves (a retail favourite) will remain in flavour. On the other side of the liquidity equation, with foreign shareholding at a decade low (Aug: 20.8%; mirroring GFC trough), alongside the Fed’s unlimited QE, the base now appears more palatable to envision their re-entry.

Budget 2021. We expect Budget 2021 (6 Nov) to be expansionary with a deficit target of -5.0% to -5.5% (2020 target: -6.0%). With increasing grapevine talk of snap polls (not to mention the Sarawak elections by Sept 2021), this could very well have the tone of an “Election Budget”. Broadly, we expect some of the PRIHATIN stimulus measures to be extended, no new taxes/ increases, sin sectors to be spared, positive news flow on mega projects (ECRL, MRT3, Sarawak jobs) and the property sector to see continued stimulus initiatives.

KLCI target at 1,580. We forecast CY20 KLCI earnings to fall -19%, its 3rd consecutive year of decline. However, coming off a lower base, alongside a post Covid-19/MCO recovery, this is expected to rebound +18.5% in CY21. We take this opportunity to recalibrate our P/E valuation multiple from 18.5x to 17.7x (5Y mean) in view of the rising domestic Covid-19 cases. Tagged to CY21 EPS, our 12M KLCI target stands at 1,580. Our top picks are a concoction of defensives (Tenaga, TM, MQREIT), recovery plays (MBM, Pecca, Lii Hen, FocusP), “pandemic beneficiaries” (Top Glove, Bursa) and value (Sunway, IJM, Armada).

Source: Hong Leong Investment Bank Research - 2 Oct 2020