The Health DG warned that the healthcare system is at a breaking point following the recent surge in Covid-19 cases. Speculation is rife that a “full MCO” style lockdown could return; the government has denied making this decision. For hypothetical perspective, the 6 purported MCO states make up 66% of GDP (2019). On a brighter note, the ringgit saw strength since Nov (momentarily breaking below 4.00 this week); this is positive for aviation, auto and media but negative for export related sectors (EMS, furniture, gloves and tech). While the overall 2021 recovery thesis remains broadly intact, opposing news flow between vaccine rollouts and a still rising Covid count will bring heightened volatility along this path. Maintain end-2021 KLCI target at 1,780.

Weak start. The market is off to a shaky start (KLCI fell -2.2% YTD as of 6 Jan before recovering some losses yesterday), hit by (i) surging domestic Covid-19 daily cases which chalked a new high yesterday (3,027) and (ii) increasingly fluid political scene with talk on snap polls resurfacing. It is hard not to have a feeling of déjà vu, recollecting last year’s market collapse in 1Q which was also caused by the virus outbreak and political fluidity from the “Sheraton Move”.

MCO2.0? Health Director General has warned that the healthcare system is under pressure and is at a breaking point, adding that a more “targeted approach” of the MCO is needed to lower cases. For perspective, total active cases of 25.2k (as of 7 Jan) are 88% of Covid-19 patient bed capacity (28.7k as of end-2020). Malaysia Now recently reported that the return of a “full fledge MCO” style lockdown is being considered for Penang, Selangor, KL, Melaka, Johor and Sabah. However, the government issued a statement yesterday, denying that it has made this decision.

Hypothetically speaking. The abovementioned states account for 84.4% of the total 119.1k cases from the “3rd wave” (measured from 7 Sep to 7 Jan). These states made up 65.8% of GDP in 2019, with the lion’s share of 40.6% being Klang Valley (i.e. Selangor + KL). Hypothetically speaking, implementation of “MCO2.0” would pose a temporary setback to our 2021 economic recovery projections with the magnitude depending on duration and strictness. However (again hypothetically), the impact should be less profound vs the previous MCO if done on a targeted approach. As it is, our 2021 GDP forecast of 6.0% (2020f: -5.5%) is a tad lower than MoF’s range of 6.5- 7.5%. On the other side of the coin, a “full fledge MCO” may perhaps still be avoided as Malaysia’s cumulative Covid mortality rate of 0.50% is much lower than (i) peak of 9.66% back in Mar 2020 and (ii) global stat of 2.91%.

Ringgit appreciation. Ringgit has continued its recovery (appreciating since early-Nov and momentarily breaking below 4.00 this week) on back of USD weakness. Externally, rollout of vaccine programmes, reopening of economy and continued low interest rate environment are expected to bring risk-on attitude among investors, leading to appreciation pressure on EM economies, including Malaysia. Domestically however, uncertainty among investors regarding Malaysia’s domestic policies and fiscal position (e.g. status in WGBI and sovereign credit rating decisions) and persistent increase in domestic Covid-19 infections may cap appreciation pressure on the ringgit. All in all, we expect USD-MYR to average 4.00 throughout 2021, an appreciation bias from 4.21 in 2020. Sectorial wise, a stronger ringgit (vs USD) is positive for aviation (lease, borrowing and fuel cost in USD), autos (CKD kits and CBU packs in USD) and media (USD content cost). On the flipside, this would be negative for export related sectors that derive USD denominated revenues (EMS, gloves, tech and furniture).

Volatile recovery path. As explained in our 2021 Outlook (15 Dec), we expect Malaysia to achieve an immunisation rate of 20% by end-2021; vaccine supply agreements have been inked for c.40% of the population thus far. This implies that most of Malaysians will still have to contend with living in this “new normal” for 2021. While the overall 2021 recovery thesis remains intact, opposing news flow between vaccine rollouts and a still rising Covid count will bring about much volatility along this path, perhaps also exacerbated by fluid politics and RSS reintroduction. We keep our end2021 KLCI target at 1,780 based on 19.3x PE (+1SD to 5Y mean, reflecting a “recovery premium”) tagged to CY21 EPS. Our top picks have a recovery bias (Tenaga, RHB, 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 - 8 Jan 2021