Malaysia’s gross domestic product (GDP) declined further, contracting 5.6% in 4Q20, largely because of the conditional movement control order (CMCO) reintroduced in October 2020. While Macquarie Equities Research (MQ Research) is optimistic that the vaccine rollout should spur confidence and remains constructive on the Malaysian equity market, it still sees downside risks to GDP and market earnings growth for 2021E. MQ Research’s top picks include MYEG, PCHEM, T and others.

Event

• Bank Negara Malaysia (BNM) released 4Q20 GDP stats on Thursday, prior to the Lunar New Year holidays. The headline 5.6% year-on-year (YoY) decline of 2020 GDP was below MQ Research’s estimate for a decline of 3.1%, largely as a result of the CMCO (conditional movement control order) that was reintroduced in October, which took its toll on most segments of the economy. With the movement restrictions still in force in most of the country, MQ Research certainly sees downside risks to GDP and market earnings growth for 2021E. Nonetheless, MQ Research remains constructive on the Malaysian equity market, with an end-2021 KLCI target of 1,780 (17x price-earnings ratio (PER)). The administration of vaccines beginning in March should, in MQ Research’s view, spur consumer and business confidence into 2H21 and support valuations.

Standouts From 4Q20 GDP Release

• Manufacturing. Malaysia’s role in the global supply chain helped the manufacturing sector (23% of 2020 GDP) expand 3% YoY (+14% YoY for 4Q), with the electrical and electronics (E&E) sector driving the growth.

• Labour shortages weigh. Throughout the commentary, MQ Research does not believe one could miss the recurrence of labour shortages being blamed for slower growth. Agriculture, construction, and real estate were those that stood out. With travel restrictions still in place, MQ Research believes this is unlikely to turn around soon. In MQ Research’s view, pivoting toward automation and local labour would be the obvious solutions.
• Net portfolio investment outflows narrow. Non-resident (NR) portfolio net inflows of RM12.8bn mitigated the RM19.7bn outflow from residents. The net outflow of RM6.9bn was down from the RM23.1bn recorded in 3Q. NR inflows were largely into debt securities (+RM14.1bn).

• 4Q earnings hit for banks. BNM’s banking sector profitability indicators point to a 41% YoY decline in sector wide 4Q CY20 profit for an implied 9.2% return on equity (ROE). This is primarily driven by a 77% quarter-on-quarter (QoQ) increase in impairments/provisions to RM5.9bn (130bps annualised), which brings CY20’s total to RM14.3bn (78bps) – broadly within our expectations.

Outlook

• MQ Research is maintaining its view that investors should stick to stock-picking in Malaysia. MQ Research’s top picks favour exporters – PCHEM, KLK (replacing Sime Darby Plantation (SDPL MK, RM4.95, Outperform, TP: RM6.00)); banks – RHBBANK, CIMB; digitalisation plays – T, MAXIS, GHLS, MYEG (new); and reopening plays – GENM, MAHB. MQ Research is removing SDPL and Gamuda (GAM MK, RM3.44, Underperform, TP: RM3.00) from its picks following recent downgrades/events.

• While tech valuations continue to be elevated, MQ Research would remain invested until mid-2021 on the robust demand narrative. Rising oil prices could provide short-term spikes for service providers, although the earnings outlook is likely to remain subdued on slowing capex by Petronas. MQ Research believes small to mid-cap names will remain in focus as investors seek exposure to thematics such as electric vehicle (EV), clean energy, and semiconductors. Some small / midcap names with exposure include DOGT and GREAT in EV, SOLAR and MFCB in clean energy, and FRCB, UNI, GTB, and PENTA in semiconductors / E&E.

Source: Macquarie Research - 16 Feb 2021