While we are optimistic on a vaccine driven recovery in 2021, the path to normalcy will likely be gradual; we estimate that Malaysia will achieve an immunisation rate of 20% by end-2021. Our 2021 GDP forecast of 6.0% is a tad lower than MoF’s 6.5-7.5%. While the market may have an optimism bias next year, inevitable hiccups will bring volatility along this recovery path. We project KLCI’s core earnings to rebound +20.8% in 2021 (2020: -17.4%). Our end-2021 KLCI target of 1,780 is based on 19.3x PE (+1SD, reflecting a “recovery premium”) tagged to 2021 EPS.

Gradual vaccine driven recovery. Following encouraging vaccine efficacy results (90-95%) from Pfizer, Moderna and AstraZeneca, hope is rife that this is the beginning of Covid-19’s end. While we are optimistic on a vaccine driven recovery in 2021, we believe the path to normalcy will be gradual rather than a swift 180 degree turn. High income nations have reserved vaccine supply of more than their population size to “hedge their bets”. This is 5.6x of what COVAX has; putting to question if there will be enough for the rest of the world.

Malaysia in the vaccine game. Malaysia has inked vaccine purchase agreements for 20% of its population with Pfizer and 10% with COVAX. We reckon Sino-vaccines are the next best bet for Malaysia to hit its 70% immunisation target. 60 countries including Malaysia have been granted priority access by China for its vaccines. Nonetheless, Sino-vaccines have yet to release their efficacy results and “geopolitical frictions” may impede them obtaining FDA approval. Based on existing agreements, we estimate that Malaysia can get 20% of its population immunised by end-2021.

GDP rebound in 2021. Following an expected -5.5% GDP contraction in 2020, we forecast a rebound by +6.0% for 2021. Our estimate for the latter is a tad lower than MoF’s projected range of 6.5-7.5%, reflecting the view that majority of Malaysians (80% by our estimates) will still have to contend with living in this “new normal” in 2021. We forecast CPI to normalise to +2.5% in 2021 (2020f: -1.0%) given the absence of electricity bill discounts and higher average Brent price of USD55pb (YTD 2020: USD43pb). On OPR we expect BNM to keep it unchanged at a record low 1.75% throughout 2021 as the growth outlook will still remain exposed to Covid-19.

Recovery amid volatility. We believe the market will have an optimism bias in 2021 given positive vaccine news flow but inevitable hiccups (vaccine supply, still rising Covid count, US Presidential transition and Brexit) will bring volatility along this recovery path. A recovery climate should see switching amongst the index heavyweight sectors; i.e. from gloves into banking, plantation and O&G. Despite ending of the automatic loan moratorium, retail participation remained robust with the Oct-Dec average at 39.8% vs Sep’s 38.3%. With foreign shareholding near GFC trough (Nov: 20.8%), we feel the base now appears palatable to envision their re-entry given the “risk-on” mode. On politics, while grapevine talks of snap polls have simmered, we believe this may resurface in 2H21 (when Covid subsides).

KLCI target at 1,780. Coming off 2020’s projected -17.4% decline, we forecast KLCI’s earnings to rebound by 20.8% in 2021. Our end-2021 KLCI target of 1,780 is based on 19.3x PE (+1SD above 5Y mean, reflecting a “recovery premium”) tagged to 2021 EPS. During the 2008-2009 GFC and its subsequent recovery in 2010, the KLCI’s PE re-rated by 31.8%. Applying this similar re-rating magnitude would imply a potential “recovery peak PE” of 20.2x next year. Our top picks have a recovery bias (Tenaga, AMMB, DRB, MBM and FocusP), combined with volatility (Bursa), defensives (TM, MQREIT), value (IJM, Sunway, Armada) and sold down pandemic beneficiaries (Top Glove).

Source: Hong Leong Investment Bank Research - 15 Dec 2020