With a vastly improved Covid-19 situation, Malaysia’s economic reopening is near full swing. We forecast 2022 GDP at +5.5% and upward normalisation in OPR from 4Q onwards. Market performance may be partly detached from the broader economy as a tug of war manifests between reopening and Budget 2022’s “market unfriendly” measures. Still, there could be an upside push to the market if GE15 is called. We advocate a more trading oriented approach into next year with a “buy on weakness” range at 1,460-1,490 and “sell on strength” at 1,620-1,640. Our end-2022 KLCI target is at 1,600 (15.5x PE on CY22 EPS).

Vast improvement. Malaysia’s Covid-19 situation has seen drastic improvement since the height of its previous wave (Aug/Sept) with daily cases down -79%, ICU -68% and deaths -91%. Coupled with high vaccination rate at 78% of population, economic reopening is near full swing with all but two states in Phase 4. Mobility for most “economic related” categories have surpassed last year’s RMCO levels and check-ins on MySejahtera has doubled from the lows in June. While potential resurgence risk is very real – R-naught is flirting uncomfortably near 1.0 – we reckon Malaysia is on a stronger footing this time around to better manage, given a wider array of arsenal at its disposal (inoculation of adolescence, booster shots and “Covid pills”). While tightening of restrictions is likely if cases flare up, we believe a lockdown à la MCO1.0 and Phase 1 can be averted. Omicron though, remains the wild card.

Economic recovery but… We forecast 2022 GDP at +5.5% (2021: +3.5%) which sits at the lower end of MoF’s official target of 5.5-6.5%, reflecting fluidity of the virus’ evolution to the economy. With the need to drive economic recovery, we feel the more gradual pace of projected fiscal consolidation (2022: -6.0% of GDP vs 2021: -6.5%) is realistic. We expect BNM to begin its upward normalisation in OPR from 4Q22 onwards – a 25bps hike to 2.00% – given our view that economic conditions would be more entrenched by then while GDP would have also recovered to pre-pandemic levels. Furthermore, we project inflation to be more modest in 2022 with CPI forecast at +2.0% vs 2021’s +2.4% on expectations of government intervention to limit the rise in cost of living. On ringgit, we expect a slight depreciation bias with average 2022 USD-MYR at 4.16 vs 4.15 average for 2021.

…detached from the market. While corporate Malaysia has much to cheer with a relatively more reopened year ahead, two party poopers sprung an unpleasant surprise during Budget 2022 – Prosperity Tax and stamp duty hike. We are less perturbed by the former given its “one-off” nature but the latter would make Bursa the most expensive exchange to trade on within ASEAN-5. Externally, the worst from supply chain disruptions and high energy prices should be over, easing further into 1H22. Although expectations of monetary tightening have caused market jitters, we feel this has been baked-in given the generously wide spread between KLCI earnings yield and MGS10 at 3.3% or +2SD above 5Y mean. 2022 could possibly see GE15 called (historical odds favour 1H) with the market generally performing positively from six months running up to the polls. A convincing mandate to the victor could be a market game changer as it paves way for necessary bold policy moves.

KLCI target at 1,600. Following a projected +27.7% recovery in KLCI core earnings this year, we forecast 2022 to be flattish (+0.4% YoY; but a -11.8% worst case decline if Prosperity Tax is imputed). Our end-2022 KLCI target of 1,600 is based on 15.5x PE (-1SD below 5Y mean) tagged to CY22 EPS. We envisage 2022 to be another choppy year for the market as a “tug of war” manifests between Budget 2022’s market headwinds and economic reopening. As such, we advocate a more trading oriented approach into 2022 with a “buy on weakness” range at 1,460-1,490 (yes, now) and “sell on strength” range at 1,620-1,640. Our top picks are Tenaga, RHB, TM, Sunway, UWC, Astro, VS, Takaful, Armada, Kobay, TSH and FocusP.

Source: Hong Leong Investment Bank Research - 15 Dec 2021