• We believe Covid-19 may turn endemic as more than 80% of the adult population has been vaccinated. That may provide potential economic recovery going forward and we are anticipating some goodies for the construction, tourism, and consumer sectors in the upcoming Budget 2022 to boost the economy.

• Recovery theme play should be interesting under the NRP from 4Q2021 going into 2022 as business activities are likely to return to normalcy by then.

• Also, we like technology and telco on the back of higher adoption for 5G and IoT devices, electric vehicles as well as the 5G rollout story in Malaysia.

Covid-19 status

• Subsiding Covid-19 sub-indicators. Despite the daily cases on the local front still hovering above 15k mark, most of the important indicators such as death toll, hospitalisation rate, ICU occupancy are on a declining trend since two weeks ago.

• Smooth vaccination progress. Nearly 60% of the total population has achieved fully vaccinated status (2 doses), while about 70% of the total population have done at least 1 dose. Meanwhile, Klang Valley (KV) is getting nearer to the 80% mark on the fully vaccinated status.

• Malaysia in gradual recovery mode… Kedah is currently under Phase 1 and most of the states are in Phase 2 and Phase 3. Meanwhile, Labuan and Negeri Sembilan are the regions with Phase 4 status under the National Recovery Plan. PM has announced that offices will be allowed to operate under certain conditions from 17th Sept 2021 if their workforce is 40-60% fully inoculated. Also, interstate travel and tourism activities are allowed when adult vaccination rate is above 90%.
• Crucial 80% target. Although most of the indicators are pointing for a recovery, the downside risk could be the Delta variant. Hence, the 80% fully vaccinated target for Malaysia citizens will be important for the economic recovery going forward. Still, wearing facemasks and social distancing should continue to reduce daily infections.

Economic review and outlook

• The Federal Reserve is less dovish. The Fed maintained its interest rate and asset purchase programme direction, but signals potential interest rate hike by end-2022. However, the next meeting in November may send more clues to future monetary policies. Do note that the Fed is purchasing at least USD120bn of bonds monthly.

• Stimulus packages should be cushioning the downside risks.
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• Over the past 1.5 years, Malaysia has put
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• in efforts releasing stimulus packages,
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• worth roughly RM380bn to support the
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• economy. We opine these measures are
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• able to cushion the downside risk.
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• However, to reboot the economy to the
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• fullest potential we think the government
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• will need to provide more boosters in the
•  
• upcoming Budget 2022.

• Near term domestic focus. Domestic driven catalysts are likely to be seen in Budget 2022, as the travel borders remained restricted. Thus, higher development expenditure is expected and may benefit the construction sector, while measures or policies related to domestic tourism, automotive and property sectors could be crafted to rekindle the domestic consumption activities.

• Lower expectation on economic growth. In 2020, Malaysia’s GDP contracted -5.6% YoY. Based on Bloomberg consensus, Malaysia’s GDP is projected to grow at a rate of 4.1% and 5.7% in 2021-2022. Do note that MoF has toned down their projections for 2021 to 3-4% (vs. 6.5-7.5% in Budget 2021), and this will be a realistic target as we are coming out of the Covid-19 pandemic environment.

Market review and outlook

• Global markets look overvalued, while the local market is at a discount. The MSCI World Index and S&P500 are trading at 24.2x and 26.7x vs. 10Y avg PE of 19.7x and 19.5x, respectively, while the FBM KLCI is trading at 14.9x PE (10Y avg PE of 17.7x).

• Trading activities slowed down, but foreign funds are returning. YTD average daily trading value (ADTV) dropped 26.2% to RM3.75bn in 2Q21 (1Q21: RM5.08bn). QTD, ADTV has declined further to RM2.85bn. Nevertheless, foreign investors have turned net buyers for the month of August, scooping up RM1.05bn in equities, while MTD registered another RM847.9m of buying flows in the local exchange.

• Big caps were flat, but small caps gained strength. In 3Q21, the FBMKLCI was flat, while FBM Small Cap and FBMACE added 3.0% and 3.1%, respectively. Overall, technology (+23.0%) was the leading sector, followed by the industrial products (+7.7%) sector. Meanwhile, the healthcare and energy sectors lost -13.7% and -9.9% respectively.

• Supercycle commodities are still upward trending. Most of the commodities that have rallied under this Covid-19 pandemic due to shipping disruptions and supply constraints could remain elevated. However, technical readings on Bloomberg Commodity Index might be forming bearish divergence signal.

4Q21 Strategy – Recovery begins with an ENDemic

• Covid-19 induced recession to regain momentum. Economy contracted in 2020, but we opine that the recovery is on its way. With the help of a smooth vaccination drive, 80% of Malaysia’s adult population are fully vaccinated with Covid-19 vaccine and it will be meaningful for businesses to operate under comfortable conditions with less severe Covid-19 conditions. Eventually, rebooting the economic activities in a broader manner and returning to normalcy by 2022.

• Restarting the construction is crucial… Given the international travel restrictions are not uplifted, we expect more infra works to be seen in the upcoming Budget 2022 and that should kick start the economy at least for the domestic front. Also, we favour the building material segment, which is the proxy to the construction sector.

• …and revitalising the domestic economy. While waiting for the international borders to be uplifted, domestic tourism will be important in stimulating the economy. With the Langkawi travel bubble pilot project started recently, we feel the revenge spending is surfacing in a significant manner and that should be a decent catalyst for tourism, aviation and consumer related stocks.

• Technology sector is likely to be the winner. 
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• Technology sector continues to rise despite the chip shortages issues
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• globally; the Bursa Technology Index rose 39% YTD.
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  Technology: KGB 

• We believe the adoption in 5G and IoT devices, as well as higher demand in electronic gadgets under the Covid-19 environment will remain as the main catalysts for the sector. Meanwhile, the hype in electric vehicles will continue to provide positive sentiment for the sector.
• Progressive 5G rollouts in Malaysia. Malaysia has setup the National 5G Task Force in Nov 2018 and introduced Jalinan Digital Negara (JENDELA) in Aug 2020 to provide wider coverage and better quality of broadband experience for the Rakyat and it was further supported by the Digital Economy Blueprint – MyDIGITAL that focuses on the rollout of 5G technology going forward, where Malaysia’s 5G network and infrastructure across the whole nation will be done by Malaysia’s single wholesale 5G-network operator - Digital Nasional Berhad (DNB).