Despite cases from the “Omicron wave” returning to the highs of last year, “severity indicators” – symptomatic cases, ICU and mortality – remain at bay, thanks in part to high vaccination rates. While averting another lockdown is a plausible scenario, economic softening could still ensue from reduced mobility, thus leaving our 2022 GDP forecast (+5.5%) at the lower end of MOF’s range. With the KLCI hitting our 1,600 target, we feel the risk-to-reward profile has turned less attractive and continue to advocate a trading oriented approach for 2022 –“sell on strength” at >1,600 and “buy on weakness” at <1,500.

Brace the resurgence. Daily Covid-19 cases in Malaysia have seen an exponential resurgence since the start of 2022, surging 6-folds from end-2021. Recent daily cases of 20-23k (11-14 Feb) are close to last year’s high of 24.6k (on 26 Aug). The inevitable resurgence was due to the onslaught of Omicron (OWID estimates c.80% of cases in Malaysia are from the said variant) alongside reopening, which was also perhaps exacerbated by the recent Lunar New Year festivities. In the past, significant rise in R naught (a measure of the virus’ infectivity) above 1.0 has been a good gauge of subsequent Covid-19 waves. Malaysia’s R-naught reading recently chalked a record 1.51 (10-11 Feb) with this month’s average at 1.32, much higher than what was witnessed during 2021’s Apr-May and Jul-Sep waves. Test positivity rate (based on 7DMA) has risen from the low of 2.6% in Jan to 7.5% currently. Taking cue from the Omicron experience globally which saw daily cases jump over 4-folds from 2021’s peak, it wouldn’t be too farfetched to caution that Malaysia could mirror this trajectory.

Severity indicators still at bay. Despite the spike in Malaysia’s headline cases, we draw some comfort that “severity indictors” are still under control. While average daily symptomatic cases (i.e. category 3-5) has risen 76% MoM (43 to 76) in Feb, its proportion to overall cases remains on a declining trend (Dec: 1.8%, Jan: 1.2%, MTD Feb: 0.6%). ICU cases recently saw a slight uptick – rising from a low of 81 to 94 between 8-14 Feb – but this is still way better than >1k during the Jul-Sep 2021 wave. In addition, the ratio of ICU-to-active cases remains at a low of 0.06% (peak: 1.45%, June 2021). Most importantly, mortality has not seen an upswing as daily deaths in Feb mostly recorded “single digits to teens” despite headline cases inching close to the levels during the deadly Jul-Sep 2021 wave (average deaths of 230/day back then).

Lockdown can be averted. The government has repeatedly reassured that it will not implement another lockdown (à la MCO1.0 and Phase 1 style). We believe this will be the case, so long as the abovementioned severity indicators remain at bay – a plausible scenario considering Malaysia’s relatively high vaccination rate at 98% of adults (57.1% boosted), 88.8% of adolescence and commencement of child inoculation earlier this month. Despite a reasonable chance that another lockdown can be averted, we are cognisant that economic softening could still ensue from reduced mobility as people self-impose restrictions. For MTD-Feb, Google Mobility Report showed some mobility reduction in three out of the four “economic related” categories , while check-ins on MySejahtera declined -5.3% MoM in Jan and -11.8% in Feb. With this in mind, our 2022 GDP forecast of 5.5% remains at the lower end of MOF’s range of 5.5-6.5%. Should the Omicron wave in Malaysia pass with limited economic repercussions (i.e. no lockdown), we see increasing probability of two OPR hikes this year – our official stance is now one (+25bps) in 4Q22.

Hitting our target. KLCI has rebounded +6% from its YTD low (25 Jan: 1,509), on back of the NSC’s proposed boarder reopening on 1 Mar (still requires Cabinet deliberation), alongside foreign inflows (MTD-Feb: +RM796m; Jan: +RM332m). With the KLCI hitting our 1,600 target (15.5x PE; -1SD), we feel the risk-to-reward profile has turned less attractive. We continue to advocate a trading oriented approach for 2022 –“sell on strength” at >1,600 and “buy on weakness” at <1,500.

Source: Hong Leong Investment Bank Research - 16 Feb 2022