Last week, Bank Negara Malaysia (BNM) set a dovish tone and had a cautious sentiment on the coronavirus outbreak, noting that there’s “ample room” to adjust interest rates. Macquarie Equities Research (MQ Research) says there’s a good chance that there will be another 0.25% interest rate cut in early March, though another cut in May is only likely if the impact of the outbreak is prolonged.

Event

• Malaysia’s 4Q19 GDP print of 3.6% (2019: 4.3%) was the weakest since 3Q09. Underlying data, however, showed positive trends across the board except for agriculture and electrical and electronic (E&E). Nonetheless, the Coronavirus will have a negative impact on 1H20 gross domestic product (GDP), and MQ Research believes there is now a good chance that Bank Negara cuts rates 25bps at its next meeting in March. The government is expected to announce a stimulus package shortly to mitigate the impact of the virus. MQ Research also maintains its view that a pickup in government procurement is on the cards and will stimulate business activity through 2020. This, MQ Research believes will be a key rerating for the market in general given the subdued expectations of investors in general.

Impact

• Underlying trend positive. Despite the subdued GDP print, MQ Research notes that most indicators showed an uptick vs 3Q19. Public consumption was up 1.3% (3Q19 1.0%) on higher emoluments while Public investments declined less (-7.7%) vs 3Q19 (-14.1%). Despite the negativity around business confidence, private investments were up 4.2% year on year (YoY) – their highest levels since 4Q18 on higher capex in the transport services and construction-related manufacturing. Improved employment growth and private sector wages supported an 8.1% YoY increase in private consumption growth (3Q19 7.0%).

• Agriculture, E&E weak spots. By activity, the agriculture sectors and E&E manufacturing were the key drags on growth in 4Q19. Lower crude palm oil (CPO) production on the back of dry weather and reduced fertiliser application saw the agriculture sector post a 5.7% YoY decline in 4Q19. Higher price realisation in coming quarters should mitigate this impact going forward. Meanwhile weaker global demand for semiconductors was blamed for slower growth in the manufacturing sector, which grew 3.0% in 4Q19 vs 3.7% in 3Q19.

• BNM likely to cut. BNM’s tone in its commentary around 2020 does suggest to us that another 25bp rate cut is likely in March. A further cut in May is only likely, in MQ Research’s view, if the impact of the coronavirus is prolonged. With Malaysian GDP growth still outpacing regional peers and rates (10 year bond yield 3.1%) still attractive, it does suggest to us that the pressure on the MYR from further cuts is likely to be muted. For banks under MQ Research’s coverage, every 25bps cut in rates impacts earnings by 1.5-2.5%.

Outlook

MQ Research maintains its view that a pickup in government activity will fuel increased activity levels and greater interest in Malaysian equities. MQ Research’s recent interactions with both local and foreign investors suggest that expectations remain muted and improved data points are likely to spur a rerating.

Source: Macquarie Research - 17 Feb 2020