Following yesterday’s Conditional Movement Control Order (CMCO) announcement by the Malaysian government to be implemented in the Klang Valley and the state of Sabah due to the recent spike in COVID cases, Macquarie Equities Research (MQ Research) believes that the market impact of these restrictions would be limited due to the fact that businesses are still allowed to operate.

Event

• The Malaysian government has imposed a Conditional Movement Control Order (CMCO) in the Klang Valley and the state of Sabah following the recent spike in COVID cases. Restrictions primarily apply to non-essential activities (see: CMCO conditions). Most importantly, businesses, including factories, will be allowed to continue operations subject to social distancing requirements. This is similar to the situation in May 2020, which allowed economic activity to rebound after the restrictive MCO of March/April.

Impact

• Market impact limited. MQ Research sees these restrictions having minimal impact on the equity market, considering valuations in most sectors have already regressed to COVID lows earlier this year. With businesses allowed to operate, the negative impact on the earnings of listed companies should be minimal as evidenced by the positive commentary from corporates following the lifting of the MCO during their 2Q20 results briefings. Previously implemented COVID-mitigation measures (eg work from home) should also minimise operational disruptions. One cause for caution, is the (for now) lack of government-led stimulus, which was very strong during the last lockdown. This may be addressed in the 2021 budget, which will be expansionary. Furthermore, these restrictions are limited to the Klang Valley and the state of Sabah. A few other districts in Kedah have also had restrictions imposed in recent weeks.

• Leadership change? Datuk Seri Anwar Ibrahim has stated that he will have an audience with the King on 13 October, where he aims to show that he has the support of a majority of the 222-member parliament. As MQ Research highlighted before, a strong majority in parliament will be a positive for the country and the economy. However, the final outcome may require a General Election to settle the matter once and for all, to avoid another change down the road if coalition members decide to shift their support. The spike in COVID cases following the recent Sabah state elections unfortunately does mean that a swift general election may be off the cards for at least a few months.

Outlook

MQ Research remains constructive on the market, seeing these restrictions as transitionary. As global news flow around a COVID vaccine gathers momentum, MQ Research would expect some rotation out of glove names (short-term beneficiaries of uncertainty) into laggard sectors such as banks (CIMB, RHBBANK) and reopening plays (GENM, MAHB). An ongoing move towards digitalisation of the economy should benefit telcos (TM). Exporters (SDPL, PCHEM) remain firmly in MQ Research’s top picks list and may receive a boost from volatility in the RM ahead of the US elections. MQ Research would also look for weakness in the construction/infra names (GAM, ECON, RANH) and Tenaga as buying opportunities – the former especially as the political situation settles down.

Source: Macquarie Research - 13 Oct 2020