Recent comments by the Health DG and some restriction relaxation leads us to believe that MCO2.0 may be lifted before the Lunar New Year. W hile this is a near term economic positi ve, we feel it poses case resurgence risk with negative ramifications down the road. Like most countries, the government is caught in between a rock and a hard place, having to juggle between health and economics. We lower 2021 GDP forecast from 6.0% to 5.0% and expect the OPR to be cut by 25bps to 1.50% in 1H21. To reflect near term headwinds, we reduce our PE target by 1SD to mean (17.4x) and lower our end-2021 KLCI target from 1,780 to 1,740. While our recovery thesis remains (albeit delayed), the journey will be a choppy one.

MCO2.0 may be lifted soon. During a recent virtual press conference, the Health DG hinted that MCO2.0 could soon be lifted: “If we implement the MCO for 4 weeks until early-Feb, followed by a CMCO for 3 months, we hope we can reduce the number of Covid-19 cases to double figures”. If so, MCO2.0 could possibly end on 10 Feb, 4 weeks since it began on 13 Jan and right before the Lunar New Year. This news alongside recent relaxations (e.g. biz hours extended from 8pm to 10pm and interstate travel for long distant spouses) leads us to believe that the bias is towards an early reopening rather than prolonged extension. Nonetheless, in our view, should MCO2.0 be lifted early-Feb, mass interstate travel will likely remain banned in the near term (similar to MCO1.0 which ended on 3 May but interstate travel was only allowed from 10 June). To recap, the entire Malaysia (except Sarawak) is now under MCO until 4 Feb, possibly still a moving target depending on the case count.

Near term positive but... The potential lifting of MCO in early Feb (followed by a transition to CMCO) is a near term positive for the economy and should lift market sentiment. Sectors that were hardest hit by MCO2.0 are expected to be rebound beneficiaries: auto (visitor recovery to showrooms), brewery (out of home drinking), consumer staples (higher purchases from HORECA channels), media (adex revival), property (sales gallery reopening) and retail (higher footfall, including for mall based REITs). However, given our expectation for interstate travel to remain banned, tourism related industries (i.e. aviation, hotels, Genting) may continue to face challenging times. For healthcare, lifting of MCO2.0 may not necessarily see a recovery of previously delayed non-critical treatments, given the possible stigma that private hospitals can now accept Covid-19 patients.

Lessons from MCO1.0. When MCO1.0 was enacted (18 Mar to 3 May 2020), daily cases did not immediately fall, but rather stayed range bound around 100-200 with sporadic spikes above 200; this “peak plateau stage” lasted a month (mid -Mar to mid Apr). Subsequently from mid-Apr to mid-May (roughly 1 month), the pandemic curve transitioned to the “decline stage”, characterised by a sustained fall in daily cases to eventually “settle” at below 50 which lasted from mid-May to early-Sep (barring few spikes along the way from immigration depots). Refer to Figure #2.

Resurgence risk may return to haunt. Judging from the experience of MCO1.0, we reckon that MCO2.0 will probably need to last at least 2 months (i.e. until mid-Mar) for daily cases to be reduced meaningfully. While lifting this earlier (i.e. 4 weeks as the DG hinted) is a near term economic positive, this could run the risk of an eventual resurgence of cases not too far down the road which may dampen economic activity and bring rise to another round of lockdown concerns. In our view, flattening the curve this time around is also a tougher task as (i) cases are much higher now than it was during MCO1.0 (18x more on a peak-to-peak comparison) while (ii) restrictions are less stringent vs the previous round. We empathise with the government, which like many other countries, is caught in between a rock and a hard place; opening too soon has resurgence risk while prolonging would hit the economy.

Waiting for the cavalry. While the impending rollout of vaccines may help curb the risk of case resurgence (Malaysia targets to start jabbing in Mar), there may be a laggard effect. Drawing from the experience in Israel, daily cases still continued to surge for a month (by as much as 3.7x) after vaccination began on 19 Dec. This is despite Israel having the world’s most aggressive vaccination drive with 29% of its population having received the first dose and 12% getting the second. Malaysia has thus far inked vaccine agreements with COVAX, Pfizer and AstraZeneca to cover 57.9% of its population while the remaining supply is expected to come from Sinovac, CanSino and Gamaleya. Based on inked agreements and adjusted for demand (i.e. 2/3rds of Malaysians surveyed said they will take the vaccine), we estimate that Malaysia can inoculate 25.8% of its population by end-2021. The government has set a rather ambitious target at 80% of population by 1Q22 but some external estimates are lower; e.g. The Economist Intelligence Unit (EIU) projects 60% by 4Q22

Revising GDP to reflect MCO2.0. Under current SOPs, we project the economy to lose RM0.7bn/day (MCO 1.0: RM2.4bn). On the assumption that MCO2.0 is extended for 4 weeks until 10 Feb, we downgrade our 2021 GDP to +5.0% YoY (previous: +6.0%; 2020f: -5.5%). MOF recently mentioned (on 22 Jan) that the official GDP forecast for 2021 is at risk but are maintaining it at +6.5 to +7.5% for now, noting that the bias is towards the lower end.

OPR cut possible. In the last MPC meeting, the Committee noted that given the uncertainties surrounding the pandemic, the stance of monetary policy going forward will be determined by new data and information, and their implications on the overall outlook for inflation and domestic growth. While there is lower concern of tighter or prolonged MCO2.0, the high case count may continue to constrain mobility and demand going forward, posing downside risk to Malaysia’s GDP forecast. Hence, we opine that BNM will reduce the OPR by another 25bps to 1.50% in 1H 2021.

Recovery thesis remains, albeit delayed. After adjusting for the KLCI constituents (Supermax replacing KLCCSS), and upgrades mainly on the glove sector, CY20/21 growth forecast is now at -14.7%/+26.5%. To also reflect the near term headwinds, we reduce our PE target by 1SD to 5Y mean at 17.4x, lowering our end-CY21 KLCI target to 1,740 (from 1,780), still implying a decent 10% upside from current levels. While our recovery thesis remains (albeit delayed), the path will be a choppy one given opposing news flow between positive vaccine developments and a still elevated Covid count (both globally and at home).

Top picks. With our TPs hit/nearing, we remove TM, Inari, Sentral and FocusP from our top picks as well as IJM (soft sector sentiment with cancellation of HSR). In replacement, we include TIME, Axis, AEON and GDB. We take adopt a more balanced approach in our top picks with a combination of reco very plays (Tenaga, RHB, DRB, MBM, AEON, GDB), volatility (Bursa) defensives (TIME, Axis), value (Sunway, Armada) and sold down pandemic beneficiaries (Top Glove).

Source: Hong Leong Investment Bank Research - 29 Jan 2021