Macquarie Equities Research (MQ Research) released a report (15 Jun) stating that it expects the Malaysian market to remain buoyant in 3Q20 before easing, and then rising again into late 2020 and 1H2021. MQ Research expects improving Covid newsflow and liquidity to drive valuations even as financial and economic numbers lag, while politics and a potential Covid second wave are key risks in 2H20.

Buoyant Till 3Q20 at Least

In line with Macquarie Head of Asian Strategy Viktor Shvet’s view, MQ Research expects the Malaysian market to remain buoyant in 3Q20 before pulling back in the Sept/Oct period, and then rising again into late 2020 and 1H2021. As Viktor outlines, 1) improved newsflow around Covid, 2) the unprecedented global and monetary fiscal support (~US$20tn), and 3) a contained or weaker USD as oil prices stabilise should be contributing factors to outperformance in Emerging Markets (EMs). These will in MQ Research’s view outshine the negative economic and financial results expected in coming quarters. MQ Research’s end 2020 KLCI target is 1578 (+2%).

Mind the Gap

While MQ Research expects the Malaysian economy to contract 3.1% in 2020, with the worst impact in 2Q20 (-6%) and unemployment and business closures likely to extend to 4Q20. Nonetheless, as evidence of growth into 2021 takes hold, MQ Research expects consumer and business confidence to improve. For MQ Research’s coverage, it sees earnings growth accelerating 33% in 21E after an 18% decline in 20E. With risk premiums still above average and investors still relatively cashed up, the market is likely to stay buoyant.

Global thematics still in focus, adding some risk

The easy gains in the market since mid-March’s bottoms are over, and MQ Research believes Malaysia will revert to a stock-picking market once again. MQ Research’s picks are largely focused on the cyclical rebound of a post Covid world. To that end, MQ Research remains positive on export/global thematics, with gloves (TOPG), petrochemicals (PCHEM) and plantations (SDPL) firmly in MQ Research’s top picks list. MQ Research adds Genting Malaysia (GENM) to its top picks, joining Malaysia Airports (MAHB) for the resumption of domestic tourism. Banks focused on corporate lending (CIMB, RHBBANK) MQ Research believes will outperform from being laggards in 1H20, despite increased credit costs, as the growth of 21E replaces the fear of 20E. MQ Research adds Telekom Malaysia to its top pick lists as a play on increased digitalisation of the economy. MQ Research would continue to hold on to Tenaga for its defensiveness and capital management prospects. In the smaller cap space, MQ Research likes Ranhill and Econpile. While airlines, oil & gas and property are likely to be beneficiaries of the opening up of the economy, MQ Research believes balance sheet risks are elevated and investors should take profit on spikes.

Politics and Covid second wave key risks but may not deflate market

While there is growing noise on the ground about Pakatan Harapan trying to return to government, MQ Research believes it will have minimal impact on the economy and large-cap listed players. Large contracts may be delayed, but the civil service has proven that it can still operate. Meanwhile, MQ Research believes a second wave of Covid infections, while likely, should not lead to a complete lockdown of the economy – but may see more targeted restrictions to contain it.

Source: Macquarie Research - 17 Jun 2020