Yesterday, the Prime Minister Muhyiddin Yassin announced stricter movement restrictions, as anticipated by Macquarie Equities Research (MQ Research) earlier. While this may have negative impact on 21E earnings growth, MQ Research believes investors should continue to focus on the reopening thematic while expecting that the general election may happen as soon as Covid19 cases are under control.

Event

• Prime Minister Muhyiddin Yassin has announced that stricter movement restrictions, movement control order (MCO), will be re-introduced in six states effective 13 January 2021 for two weeks to break the sharp rise in Covid infections of late. As per MQ Research’s report, the spike in Covid cases and the movement restrictions were not unexpected and will have a negative impact on 21E earnings growth. However, MQ Research believes investors should continue to focus on the reopening thematic as the implementation of vaccines begins in February/March.

• The withdrawal of support of two UMNO MPs for the PM and the likelihood of UMNO pulling support following its Supreme Council meeting on 31 January do suggest that Malaysia will go to the polls as soon as Covid cases are under control. The interim caretaker government scenario MQ Research highlighted is also likely under such a scenario.

• Both of these are in MQ Research’s view widely expected and do not change MQ Research’s positive view on the Malaysian equity market for 2021, on the basis that growing vaccination of the population globally will be positive for both the economy as well as investor sentiment towards 2022. Low yields also support equity upside.

Impact

• Movement restrictions to temper growth but brighter future to support share prices. The economic impact of this MCO is likely to be RM1bn/day or 0.9% of gross domestic product (GDP) over the two-week restrictions based on the experience of the MCO in Mar-May 2020. Unemployment is likely to see a spike in the near term, with some small and medium-sized enterprises (SMEs) likely to shut. This will temper market earnings growth expectations for 21E, although the impact on corporate earnings is likely to be less severe given steps taken through the earlier MCO to streamline costs and practices. Core industries including manufacturing, commodities, finance etc will continue to operate in states where the MCO has been reintroduced.

• Banks’ asset quality: short-term pain, long-term gain. While incrementally negative for consumption-driven businesses, the incoming movement control orders are neither as broad nor as strict as last year’s April/May lockdowns. In particular, manufacturers will not be affected this time around. MQ Research expects banks to continue exercising forbearance for businesses adversely affected by the lockdowns – delaying impaired loans recognition. Overall, MQ Research anticipates that the banking sector will take sufficient provisions in FY20, pointing to sequentially lower provisions on FY21 with less downside risk. It is also crucial to note that businesses will also suffer if daily infection numbers continue to climb and that curbing infections is beneficial in the longer term. Reiterate RHB as MQ Research’s top pick in the sector.

Outlook

• MQ Research continues to favour companies geared towards an opening up of the economy in a post-Covid world. MQ Research’s top picks favour opening up plays (MAHB, GENM), exporters (PCHEM, SDPL), selected banks (RHBBANK, CIMB) and increased digitalisation (GHLS, T, MAXIS).

Source: Macquarie Research - 12 Jan 2021