We forecast GDP at +4.0% and expect OPR to stand pat for 2021. With FMCO extended, Covid-19 cases should resume its descend while vaccination gains significant traction in 2H21. This will pave way to progress along the NRP’s reopening phases; manufacturing based sectors should come in play during Phase 2 (est. late-July) and consumer centric ones in Phase 3 (Sept-Oct). We project KLCI core earnings to rebound 24% this year and pen our KLCI target at 1,660 (16.5x PE). While transitory headwinds may have delayed reopening recovery, we believe the theme isn’t derailed.

“3rd Wave” resurgence. With Malaysia’s “3rd Wave” resurgence hitting a high of 9k in late-May, the FMCO was implemented. Although this managed to lower cases (-25% since 1 June), current levels remain elevated at 5-6k. Should the FMCO succeed in lowering the R-naught to average 0.91 over 2 months (mirroring the previous case reduction period from 5 Feb to 2 Apr), daily cases could decline by >70%. June’s average reading of 0.97 is still close to the 1.0 mark, but this should hopefully come off further with the FMCO extended.

Vaccination gains pace. Malaysia’s vaccination drive is still at an early stage with 16.7% of the population having received at least 1 shot (fully vaccinated: 6.5%). That said, vaccine administration is increasing exponentially from 22-25k per day in Mar Apr to 50k in May and 164k in June. At the helm of Malaysia’s inoculation drive, “KJ” targets daily jabs to hit at 390k in July and peak at 434k in Aug. If met, the 80% herd immunity target can be achieved by year end, by our calculations. Thankfully, anti vaxer rhetoric is waning with >2/3rd of “vaccinable population” signed up.

Lower but still a growth. We previously lowered our 2021 GDP forecast from 4.6% to 4.0% (2020: -5.6%) after factoring the impact of FMCO (which we assume an average operating capacity of 75%). Following the announcement of further stimulus measures and lower GDP projection, we project 2021 fiscal deficit to reach -6.2% (similar to last year). On inflation, we expect this to average higher at +2.2% this year (2020: -1.2%) given the rebound in Brent oil price. While the ringgit saw a weakening path in 1H21, we expect an appreciation bias from current levels in 2H21 on back of eventual economic reopening (2021f average: 4.10 USD-MYR). For 2H21, we expect BNM to leave the OPR unchanged given government’s support measures, already accommodative monetary stance and negative real interest rates.

Mapping the recovery path. We expect recovery sentiment to resurface as the Covid count descends while vaccination levels ascend, both paving way to progress to the next phase of the NRP. In our view, the transition to Phase 2 (we expect late-July) should see reopening for manufacturing (auto, building materials, EMS, furniture and tech), building (construction and property site works) and O&G related sectors. With some social activities allowed in Phase 3 (we reckon dine-ins and leisure shopping), this should benefit consumer centric sectors: auto, F&B, media, NFOs, property, retail and staples. Finally, the migration to Phase 4 will see interstate travel ban lifted (plays on Genting, REITs with hotels) and pubs reopening (brewers).

KLCI target at 1,660. Coming off last year’s low base, we project KLCI core earnings to rebound +23.9% in 2021. Our end-2021 KLCI target is penned at 1,660 based on 16.5x PE (-0.5SD to 5Y mean) tagged to 2021 EPS. We expect some market recovery in July-Aug (vaccination ramp up and transition to Phase 2) but this should be more significant in Sept-Oct (migration to Phase 3). We advocate a more balanced portfolio proposition with a lean towards recovery plays. These include: Maybank, Tenaga (broad recovery proxies), UWC, VS, MBM (Phase 2 reopening), MrDIY, FocusP (Phase 3 retail beneficiaries), TM, SENTRAL (defensives), Bursa (recovery amid volatility play), Armada and Sunway (value and value unlocking).

Economic Outlook

Global Scene

Global economy is poised for an uneven recovery. The strength and sustainability of recovery will be shaped by the pace of vaccine rollouts worldwide. Countries around the world have ramped up their vaccination efforts; this can be seen in advanced economies where substantial progress was made. Consequently, the IMF and World Bank have revised upwards their global growth forecasts for the year to 6.0% (previous: 5.5%) and 5.6% (previous: 4.1%) respectively, mainly on strong rebounds from these advanced economies, as well as rising business and consumer confidence and extensive policy support. Economic recovery will diverge across countries, reflecting uneven access to vaccines (IMF foresees widespread vaccine coverage in advanced economies by summer 2021 and globally by 2H22) and extent of policy support. Meanwhile, the WTO projects global trade to increase by +8.0% in 2021 (2020: -5.3%) as restrictions on mobility eases up, continuing its rebound from the collapse that bottomed out in 2Q20. Services trade will likely remain subdued due to restrictions on international travel.

Source: Hong Leong Investment Bank Research - 30 Jun 2021