Despite the implementation of the Movement Control Order (MCO) 2.0 for nearly 2 months earlier this year, the Malaysian economy improved in 1Q21, contracting 0.5% year-on-year (YoY), with all economic sectors showing improvements especially the manufacturing sector. Macquarie Equities Research (MQ Research) thinks that the impact of MCO3.0 will likely be muted, similar to MCO2.0 and forecasts a 5.5% growth in 2021 while Bank Negara estimates a 6.0%-7.5% growth. MQ Research continues to favor reopening plays with its FBM KLCI 2021 year-end target of 1,780 (unchanged).

GDP improved despite MCO2.0; MCO3.0 impact likely to be muted

• Despite the implementation of MCO2.0 (Movement Control Order; 13 Jan-4 Mar), all segments showed sequential improvements, lifting 1Q21 gross domestic product (GDP) to -0.5% YoY from -3.4% in 4Q20, with March posting a 6.0% YoY increase. The imposition of MCO3.0 (nationwide from 12 May) is likely to have a muted impact on the economy similar to MCO2.0 as the restrictions imposed are similar, with most economic sectors allowed to operate. Against this backdrop, Bank Negara Malaysia (BNM) is sticking to its 6.0-7.5% YoY GDP growth estimates for 2021 vs MQ Research’s 5.5% estimate. Further movement restrictions domestically and globally remain a key risk to these estimates as well as MQ Research’s market estimates. Nonetheless, MQ Research remains constructive on the Malaysian equity market with an end-2021 KLCI target of 1,780.

Standouts From 1Q21 GDP Release

• Manufacturing still a key driver, other segments improving. The manufacturing sector remained the standout with 6% YoY growth in 1Q21, with agriculture expanding 0.4%. Other sectors still posted negative YoY growth albeit at a slower rate to 4Q20. Private investments were positive for the first time since 4Q19 as the manufacturing and services sectors lifted capex. All in all, this supports MQ Research’s thesis of an improving economy in 2021 and MQ Research’s preference for reopening plays in general.

• Inflation up but transitionary. BNM expects headline inflation to hit 6.5-7.0% in May/June before easing to less than 5% in 2H21, with an average 2.5-4.0% expected for 2021. Noting that this was transitionary, BNM remains accommodative in its policies albeit noting the need to remain vigilant against a build-up of financial imbalances.

• Portfolio flows turn positive. Net portfolio investments turned marginally (+RM0.4bn) positive for the first time since 2Q20, as resident outflows (-29% to RM14bn) slowed and non-resident flow remained positive.

• Banks: Downside risks from the recurrent lockdowns will likely be skewed to non-consumer loans (vs consumer loans) from asset growth and quality perspectives. Nonetheless, MQ Research remains constructive on banks following ample and sufficient pre-emptive loan loss provisions taken 2020.

Outlook

• MQ Research remains constructive on the KLCI with a preference on reopening plays (MAHB, GENM), exporters (PCHEM, KLK), digitalisation plays (T, MAXIS , GHL, MYEG) and selected corporate banks (RHBBANK, CIMB). Stocks exposed to key thematics: e.g. tech (INRI, VITRO, FRCB), clean energy (SOLAR, MFCB) and EV (GREAT, DOGT). In the near term, rising COVID cases, politics, and the typical summer lull in markets could see some volatility in the market.

Source: Macquarie Research - 19 May 2021