The coronavirus is spreading at a far more rapid pace than SARS while the WHO has just declared this a global health emergency. With China being Malaysia’s largest trading partner and a major tourist source, the ‘chill’ will likely reverberate across the economy and dampen GDP growth and corporate earnings. The rubber gloves sector is the only one that can be singled out as a clear-cut beneficiary. There may still be upside in that sector as PE valuations have not reverted to previous highs. Overall, we believe it is too early to make any proper assessment on market growth and earnings forecasts, and leave these unchanged. We stay Neutral on the KLCI although rising downside risk may justify a lower target PE multiple.

Coronavirus Spreading at Accelerated Pace

The coronavirus which was first detected in December 2019, started to be closely monitored after it was detected that transmission could be through humans. At latest count, the virus has spread and been found in nearly every continent, standing at 9,480 victims. Comparing this against the SARS episode, fatality rates appear to be half those of SARS although the speed of contagion is nearly doubly as quick (Fig 1 and 2).

Not Comparable to SARS, Likely Worse

Considering that China is the focal point of the Wuhan episode, we take a look back at the SARS episode to determine financial implications on the Malaysia economy and market. Quite clearly, consumption spending took a dip in China back then. Although China’s GDP growth rose from 9.2% in 2002 to 10% in 2003, quarterly GDP growth slowed in 2Q03 to 6.7% due to the impact of SARS from 9.9% in 1Q03 before returning to 9.1% in 3Q03. Given the pace of the virus outbreak this time round, it is thus fair to assume that implications would be at least no less than before, especially considering the size, manufacturing role and the strong intertwined relationship the Chinese economy has today. Any prolonged lock down or cities that are placed under curfew could disrupt manufacturing supply chains and have broad negative implications for Malaysia.

As China Sneezes, Malaysia Will Feel the Flu

While there are reports claiming that the coronavirus has been replicated and potentially leading to an antidote, we would believe that there would be downside risk to Malaysia’s GDP growth, RM and corporate earnings in the immediate term, although making a proper assessment on the exact impact will likely be difficult. Nevertheless, with China being one of Malaysia’s and the ASEAN region’s main trading partners, a slowdown in China’s GDP growth is expected to impact trade performance of the region including Malaysia especially if the outbreak worsens. In terms of tourism, the coronavirus outbreak may negatively weigh on Malaysia’s tourist arrivals and receipts as tourists are likely to delay or cancel travel plans.

Weaker Growth Prospects May Justify a Lower PE Multiple

However, we expect GDP growth to be supported by BNM’s accommodative monetary policy as well as a possible fiscal stimulus. We would not rule out a further cut in the OPR. Nevertheless, a sharp slowdown in growth would also justify a lower target PE multiple for the KLCI. For now, we maintain our Neutral rating and end-2020 KLCI target of 1,660, based on PER of 18x (past-5-year mean) on KLCI 2020E EPS

Sector Implication – Gloves, the Only Outright Positive

Broadly speaking, except for the Rubber Gloves sector (Overweight) (please refer to Affin Hwang’s latest sector report Outbreak could drive prices higher, 21 January 2020), the first order effect from a general economic slowdown is negative across most of the sectors under our coverage (Fig 3). Elsewhere, we find that most companies have some form of operations in China or in the affected regions, which could lead to business disruptions

Source: Affin Hwang Research - 31 Jan 2020