Following the recent 2.7% shrinkage in 3Q20 gross domestic product (GDP), Bank Negara Malaysia (BNM) is looking at a 4.5% contraction in Malaysian economy for 2020 and a recovery of 6.5% to 7.5% for 2021, which is largely in-line with Macquarie Equities Research’s (MQ Research) forecast. MQ Research remains constructive on the Malaysian equity market going into 2021 and prefers counters such as CIMB, MAHB, PCHEM and more.

Event

• BNM released 3Q20 GDP stats Friday afternoon, with almost all segments showing sequential improvement quarter on quarter (QoQ), as the economy came out of MCO and the global economy showed signs of recovery. GDP contracted 2.7% YoY for 3Q20 vs a 17.1% contraction for 2Q20, signifying 18.2% QoQ sa growth. Importantly, commentary by BNM around the current CMCO (conditional movement control order) is that the GDP impact of the current CMCO is half as much as the MCO in March–May 2020. BNM expects Malaysian GDP to contract 4.5% for 2020 with a recovery of 6.5–7.5% for 2021 – largely in line with MQ Research’s 2021 expectation albeit with a slower 2020E and a stronger 2021E recovery.

Impact

• Broad-based recovery helped by manufacturing, exports, autos, ICT, and public spending. It was not a surprise that the 3Q commentary was positive sequentially across the board. Standouts were the improvements in manufacturing, particularly the electrical and electronics sector, which saw increased demand from increased global activity as well as meeting backlogs. Malaysia’s exports were up 4.4% year on year (YoY) for 3Q20 as a result. The recent results brief by Gas Malaysia Berhad also suggested industrial consumption has been relatively unaffected by CMCO for October/November following a rebound to pre-COVID gas consumption in 3Q20; this is a positive read-thru for manufacturing.

• Positive outlook with downside risks. While the outlook commentary was largely positive, BNM did note that the ongoing CMCO (and others that may follow) pose downside risks. Data for the period 14 October–10 November pointed to debit card spending 27% above a January/February baseline, with online spending up 34%. Mobility, however, was down 20% vs the MCO period’s -57%. Overall, BNM saw the current CMCO having half the impact of the MCO on GDP.

• Inflation worries? In its detailed discussion, BNM did expand on the inflationary outlook. In summary, it does expect headline and core inflation to be pervasive and expects inflation to increase in 2021, albeit at a moderate pace to remain positive. The headline 1.4% contraction in inflation was largely driven by lower fuel and electricity prices.

• Standouts: Domestic outflows and jump in secondary income. In MQ Research’s view, two interesting points from the BNM report were 1) domestic portfolio outflows abroad of RM20.7bn for 3Q20 far outweighed the RM2.4bn outflow by foreigners as domestics invested overseas and 2) Malaysia recorded a secondary income account surplus of RM7.1bn due to a settlement related to a Minister of Finance (Incorporated) – potentially 1MDB related.

Outlook

• MQ Research remains constructive on the Malaysian equity market going into 2021. The headwinds of 2020 will, in MQ Research’s view, become tailwinds in 2021. MQ Research’s preference remains with exporters (SDPL, PCHEM), plays on a post-COVID recovery (GENM, MAHB), including select banks (CIMB, RHBBANK). MQ Research also sees the rising trend of digitalisation supporting a rerating of telcos with fibre and Enterprise exposure (MAXIS, T). While MQ Research expects newsflow in the construction sector to remain subdued, MQ Research maintains its preference for GAM within the sector.

Source: Macquarie Research - 17 Nov 2020