• In the previous day, the government announced MCO 2.0 which impacts Malaysia’s key economic states. Based on our estimates, for every 2-week lockdown, this could shave off 0.8ppts of our 2021E GDP growth forecast of 6%

• Early yesterday morning, the Agong announced that Malaysia would be in a state of emergency until August 1, 2021 to contain the spread of Covid19. In our view, there are prospects of further fiscal stimulus measures, but this could possibly come at the expense of sovereign ratings

• No changes to our GDP forecast and corporate earnings growth although there is increasingly downside bias. Maintain Neutral on the KLCI Background on past emergency In Malaysia, the Emergency Ordinance is used and enacted following a Proclamation of Emergency that has been issued by the Agong under Article 50 of the Constitution. There are 3 facets to an emergency consisting of security, economy and public order. Malaysia has been in a state of emergency four times. Both in 1964 and 1969, these were due to security reasons. In 1966 and 1977, the states of Sarawak and Kelantan fell into an emergency due to political chaos and instability.

An Economic Emergency, Nothing Else

In our view, given that this state of emergency is one that is not sparked by security or public order, there will not be any mobilisation of military personnel, and hence reducing any unnecessary fear. We understand that PM Tan Sri Muhyiddin is merely seeking an economic emergency, to ensure that the government’s spending in the recent months to lift the economy during the current pandemic, is not jeopardised by political developments.

KLCI Retraced 1.6%, Before Recovering Most Losses by End of the Day

There was a knee jerk reaction on the KLCI, declining as much as 1.6% earlier in the day, as the market reacted to the unanticipated turn of events. Although foreign shareholdings is already at a 10-year low, we expect foreigners to take this opportunity to further Underweight their positions in Malaysia (Fig 5). Foreigners have been net sellers on Malaysia for six of the last seven years.

KLCI Typically Recovers After Any Indiscriminate Sell Down

However, in the past, the KLCI has always recovered from such indiscriminate selling. In the last 2 significant political events in Malaysia, being the surprising win by the opposition party in the 2018 General Elections and the change in government in February 2020, the KLCI declined by 10% and 18% respectively over a short period of time. It took the KLCI a period of 3 months to recover its losses both in 2018 and in 2020 (Fig 6).

Maintain Neutral on KLCI With Year-end Target of 1,730

While the call for an emergency may signal the loss of support for the Perikatan Nasional government and further exacerbating the political instability in Malaysia, we think that any pullback on the KLCI will be an opportune time to build onto selective apolitical sectors and on selective stocks. Our stock focus remains on leaders in their respective sectors and those that continue to execute and perform well regardless of the macro environment challenges. Our sector Overweights are in the EMS, Rubber Products, Building Materials, Technology and Utilities. For stock selection, our Top Buys include quality picks such as Hartalega, QL Resources Scientex, Recovery plays like Tenaga, Aeon Credit and Press Metal, Thematic 5G plays including Inari and TM and finally Thematic trade diversion plays like VS and MTAG

Source: Affin Hwang Research - 13 Jan 2021