Macquarie Equities Research (MQ Research) remains constructive on Malaysian equities and the FBM KLCI heading into 1H21, with a forecast of 45% year-on-year (YoY) growth and 2021E target of 1,780. MQ Research also expects a role reversal for the outperformers and underperformers of 2020 while sharing it favours theme-focused sectors namely exporters, reopening plays, undervalued banks and more.

Headwinds to Become Tailwinds in 1H21

MQ Research is constructive on the FBM KLCI heading into 1H21, as MQ Research sees the key negatives of 2020 becoming catalysts for a re-rating of the market, consistent with the view of Macquarie’s Head of Asian Strategy. A post US election value rally should also stem capital outflows, which have taken market risk premiums (3.4% vs five-year average of 2.4%) back to 1Q20 highs. In 2021, MQ Research expects FBM KLCI earnings to rebound 45% YoY as economic activity rebounds and banks, in particular, get over elevated provisioning seen in 2020E. MQ Research’s end-2021 target is 1,780 (17x 22E price-to-earnings ratio (PER)) or 12% upside from the current levels.

Laggards of 2020 to outperform, outperformers to lag

As news flow around the vaccine gathers pace, MQ Research expects a role reversal for the outperformers and underperformers of 2020, i.e. falling gloves stocks will fuel a re-rating of banks, telcos and plantations, which have been laggards, with added catalysts in 2021. Improving global and domestic economic conditions underpin MQ Research’s positive view. From a thematic perspective, MQ Research favours exporters/global thematics (PCHEM and SDPL), reopening plays (GENM and MAHB), undervalued banks (RHBBANK and CIMB) and digitalisation plays (T, MAXIS and GHLS). As the earnings outlook improves for the market in general and free cash flow risks abate, high-yielding stocks should also see increased interest. Among MQ Research’s Outperform coverage, TNB, RHBBANK, GMB and RANH provide high dividend yields (>5%).

COVID-19 Waves 4, 5, 6, Etc.

Until vaccines become widely available, further flare-ups of COVID-19 cases are likely, in MQ Research’s view. However, MQ Research does not expect the government to impose nationwide movement restrictions as it did in Mar-May 2020, instead implementing more targeted restrictions to allow economic activity to continue. This should, in MQ Research’s view, limit the impact on corporate earnings and the overall market. Latest data from BNM confirms that the current Conditional Movement Control Order (CMCO) has had less of an impact on the economy vs the nationwide Movement Control Order (MCO) in Mar-May 2020.

Politics is murky; clarity likely post COVID-19

MQ Research believes the current political uncertainty will continue until general elections can be held. This will, in MQ Research’s view, mean that the government will continue to operate, but while large-scale infrastructure projects are likely to be announced, they will likely be awarded only later, i.e., a negative for the construction sector in 1H21. One thing that is clear to us is that Budget 2021 will be people friendly and will go some way in mitigating the risks of COVID-19-related restrictions. Wage subsidies, higher cash handouts to the B40 and M40 households and increased allocations for retraining will provide key safety nets during and post COVID-19, in MQ Research’s view.

Source: Macquarie Research - 25 Nov 2020