Malaysia’s Covid-19 count has fallen 75-83% from its Jan peak while mobility has recovered 13-22% from MCO2.0 levels. While Malaysia’s vaccination is still at a nascent stage, this should gain significant traction in 2H21. We believe the bias leans towards further economic reopening and maintain our 2021 GDP forecast of 5.0% alongside unchanged OPR. While rising yields have spooked equities, we draw some comfort from the GFC recovery period where both MGS yield and KLCI (absolute and PE rerating) moved upwards in tandem. Robust retail participation should provide downside support while foreign shareholding seems to have bottomed out. Maintain KLCI target at 1,740 (17.3x 2021 EPS).

Vaccine and virus tug of war. The world’s largest vaccination drive which began in Dec now chalks at 559.3m people (10.1% of vaccinable global population) having received at least 1 dose (29 Mar). While global Covid-19 cases did see a significant reduction from early-Jan to mid-Feb (-68% from peak), a resurgence occurred thereafter, though not back to peak levels. Dissecting the global numbers indicates that resurgence (from mid-Feb onwards) was more prominent in countries that have yet to see meaningful levels of inoculation (Brazil, India, EU and Turkey; all <20%). Conversely, those that achieved higher vaccination levels such as Israel (>100%), UAE (81.7%), UK (49.6%) and US (42.9%) all saw cases down trending or stabilising at a lower base, suggesting that the vaccine works when more are inoculated.

Global economic activity picked up faster than expected. In the US, vaccine rollout is gaining momentum while the latest USD1.9trn fiscal stimulus is expected to provide a major boost to economic activity. Despite more favourable growth outlook, the Fed re-iterated their stance for monetary policy to remain accommodative as long as labour market remains weak (employment is -6.2% below pre-Covid 19) and inflation does not exceed 2% YoY on a sustained basis. On the other side of the Atlantic, Euro area’s vaccination remains slow as only 15.5% of population has received at least one dose. As a result, some Euro area countries are experiencing a surge in cases, which has led the government to impose movement restrictions or delay openings. Given continued uncertainty on the virus’ evolution, major central banks are expected to maintain their ultra-accommodative stance in 2Q21.

Coming out of the 3rd Wave. Despite a less restrictive MCO2.0 (13 Jan – 4 Mar), Malaysia’s daily cases still manged to subside, coming off by 75-83% from its peak (>5k) in late-Jan. Consequently, mobility of Malaysians has now recovered by 13-22% compared to during MCO2.0 (which was already 17-34% higher vs MCO1.0). Since Malaysia began its vaccination drive on 24 Feb, 621k people have been jabbed (as of 29 Mar). While still at a nascent stage, we believe this will gain significant traction in 2H21 as most vaccine deliveries are back loaded (taking cue from Pfizer’s delivery schedule). Despite an initial slow start, vaccine registrations on MySejahtera have increased by 5.2-folds since end-Feb to 7.3m (30.2% of vaccinable population). In the recent PEMERKASA stimulus announcement, the allocation for Malaysia’s vaccination program would be increased from RM3bn to RM5bn and its herd immunity timeline target fast tracked from 1Q22 to end-2021.

Growth on the table despite MCO2.0. While MCO2.0 could affect growth in 1H-Jan, the reopening of more economic sectors in Feb and Mar is expected to limit the downtrend in 1Q21. In line with this, FM Tengku Zafrul stated that the economy is currently at c.98% of operating capacity. In 2Q21, we anticipate GDP growth to record double-digit percentage due mainly to low base effect and maintain our 2021 forecast at 5.0%. The recently announced PEMERKASA stimulus (RM20bn, of which RM11bn is direct fiscal injection) is estimated to bring 2021’s fiscal deficit to -6.0% of GDP (previously: -5.4%; 2020: -6.2%). This could cause downside risk to S&P’s credit rating review on Malaysia (now on negative watch) which is expected by June. We forecast Malaysia to register positive headline inflation of 2.5% in 2021 due to low base effect. Nevertheless, despite the improved economic data, we opine BNM will maintain the OPR at 1.75% in 2021. While we expect intermittent depreciation pressure in 2Q21 due to external factors, we maintain our forecast for ringgit to appreciate to an average of USD/MYR 4.00 in 2021 (YTD average: USD/MYR 4.07; 2020 average: USD/MYR 4.20).

A choppy 1Q21. KLCI is down YTD (-1.0% as of 29 Mar; -3.9% currency adjusted), underperforming ASEAN-5’s +0.7%. Jan-Feb saw weakness due to RSS reintroduction, worsening Covid count (peaked late Jan), MCO2.0 and rising yields. Subsequently, a rebound followed from late-Feb into Mar following a “positively surprising” 4Q20 results season, vaccine commencement, subsiding 3rd Wave and US passing its “coronavirus stimulus” (USD1.9trn). Nonetheless, following resurgence in global cases, the market saw some pullback from mid-Mar.

Recovery rerating. PM Muhyiddin has committed to avoid another blanket MCO and will instead use a more targeted approach. The bias seems tilted towards further economic reopening, with interstate travel possibly being the next major step. Coupled with Malaysia’s ongoing vaccine rollout, this augurs well with our consensus aligned recovery thesis. If past experience is telling, a recovery led valuation rerating seems like a logical postulation; during the GFC and its subsequent recovery in 2010, the KLCI’s PE rerated 31.8% from its low of 11.6x (Mar 2009) to a peak of 15.2x (Nov 2010). Applying the similar rerating magnitude of 31.8% to last year’s Covid crisis bottom PE of 14.3x (Mar 2020) could imply a potential “recovery peak PE” of 18.8x vs current level of 15.8x (-1SD to 5Y mean).

Retail participation still high, foreign shareholding at a low. It has been 6 months since the automatic loan moratorium ended (30 Sep) but retail participation has sustained in what appears to be a “structurally higher level” (1Q21: 39.3%, 4Q20: 40%, 2020: 37.4%, 10Y mean: 24.8%). Retail net buys has also gained momentum with QTD-1Q21 at RM5.02bn vs 4Q20’s RM2.63bn; this should lend some downside support to the market. On the other hand, foreign selling momentum continues to ease and finally turned net buys in Mar (MTD: +RM275m) after 20 consecutive months of outflow. Foreigners have been net sellers on Bursa in 6 of the past 7 years, bringing its shareholding to a low of 20.4% (Feb 2021). We are inclined to believe this is the bottom with the low base appearing palatable to envision their re-entry, especially if risk appetite returns in a recovery climate. Malaysia’s recent retained positon in the WGBI should help assuage outflow concerns.

Rising yield equation. 10Y Treasury yield has risen 79bps YTD to 1.71% (29 Mar) on expectations that US’ economic recovery will eventually see inflation pick up, ensuing tightened monetary policy. Mirroring this, the 10Y-MGS yield is up 65bps YTD to 3.30%. While rising yields have spooked equity markets, we take some comfort on 2 grounds. Firstly, latest policy statements by the Fed and BNM reiterated that the current accommodative monetary policy stance should stay, at least for 2021. Secondly, it is not unusual to see both rising yields and equity markets amid expectations of an economic recovery. This was witnessed during the recovery from the GFC whereby 10Y-MGS rose 128bps from late-Jan 2009 to the year-end while KLCI staged a 45.8% rebound over that same period.

Maintain KLCI target at 1,740. We project KLCI’s earnings to rebound 23.9% in 2021 (2020: -12.3%). Our end-2021 KLCI target of 1,740 is based on 17.3x PE (5Y mean), tagged to 2021 EPS. Although KLCI’s earnings yield to 10Y-MGS spread looks a tad narrow (-0.5SD below 5Y mean), other valuation yardsticks remain compelling with (i) PE at -1SD and (ii) PE gap to ASEAN-5 peers at -1SD. While we remain optimistic that 2021 will be a vaccine driven recovery year, we are cognizant that headwinds such as vaccination hiccups, case resurgence, geopolitical tensions, rating downgrade risk and fluid domestic politics will bring much volatility along this recovery path. As such, we advocate a more balanced portfolio proposition comprising recovery plays (Tenaga, RHB, DRB, MBM, IJMP, FocusP), volatility (Bursa), value (Sunway, Armada) and defensives (TM, Time, Axis).

Source: Hong Leong Investment Bank Research - 31 Mar 2021