• Malaysia’s key economic states return to MCO on 13 January. But, the economic impact is unlikely to be as severe as 2020

• There will still be negative implications to corporate earnings. The Consumer, REITS, Transport, Auto, Gaming and Property sectors are likely to be hit hardest but the impact is likely dependent on duration of lockdown

• Expected knee-jerk reaction on the KLCI, but ample liquidity should bring out the bargain hunters. No change to sector ratings and stock selection

Back to MCO From 13 January

In a national address yesterday, because of rising Covid-19 cases (Fig 3), PM Tan Sri Muhyiddin announced that the Movement Control Order would be reinstated in high-risk areas and hence affect the states of Penang, Selangor, Malacca, Johor, Sabah, Kuala Lumpur and Putrajaya for a 2-week period from 13-26 January. Among some of the other measures to be implemented are restriction of movement within a 10-km radius and only for the purchase of groceries while eateries will only be allowed to operate limited to take-away orders. To also curb the spread of the virus, interstate travel would be banned while only five essential economic sectors would be allowed to operate – manufacturing, construction, service, trade and distribution and agriculture and commodities sectors.

Key Economic States Affected, But Impact Not Nearly Similar to 2020

While this is not a nationwide lockdown as we saw in March 2020, the 2021 MCO will nevertheless impact the key contributing economic states for Malaysia. However, judging from past mistakes, we do not think that the measures this time round are as strict as in 2020, when activity mostly came to a halt. Our channel checks indicate that production workers would still be allowed to be on the manufacturing floor while the 30% restriction of workers within a company, applies to office staff.

Impact Will However be Dependent on Duration

Although the 2021 MCO is currently targeted for a period of 2 weeks, there is uncertainty as to how long this lockdown will persist. In 2020, this was for a period of 47 days and when Covid-19 cases were only a fraction of that of today. Hence there is risk of further extension to this lockdown. In any event, because of the lower activity and closure of non-essential businesses, resulting in, for example, lower footfall in malls and consumption patterns. Hence, we think that there will be some negative revision to our earnings estimates for selective sectors – Consumer, REITS, Transport, Auto, Gaming and Property sectors come to mind. Recall in the 2Q20 reporting season, corporate earnings contracted a sharp 37% qoq (Fig 4). Except for the Media, Insurance, Rubber, Technology and Plantation sectors, all other sectors saw earnings declines.

Possible knee-jerk reaction but ample liquidity could bring out bargain hunters

On the market, the KLCI suffered a 1-day decline of 1.9% after the announcement of the lockdown on 16 March 2020. The KLCI could possibly see a similar knee-jerk reaction, but we think that with the ample market liquidity, investors would be looking towards buying opportunities instead and thus capping any sharp downside. We remain Overweight in the EMS, Building materials, Rubber, Technology and Utilities sectors, which we like mostly for their growth attributes, but also believe they would be more shielded from a lockdown impact. No changes to our Top Buys and we maintain our 2021 year-end target of 1,730 for the KLCI. Key risks include a shorter- /longer-than-expected lockdown and the speed of resumption of normal economic activity.

Source: Affin Hwang Research - 12 Jan 2021