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PublicInvest Research

Author: PublicInvest   |   Latest post: Wed, 21 Oct 2020, 10:11 AM

 

Malaysia 2H 2020 - The Great Expectation

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Global Economy. The global economy is projected to contract by 4.9% in 2020, a sharper drop compared to the 2008/09 Global Financial Crisis (2009: -0.5%). Massive policy support rolled out in 1HCY20 is expected to produce tangible results in the 2H assuming COVID-19 can be brought somewhat under control. This will be a precursor for a recovery in consumption, investment, trade, commodity, capital markets and above all, employment. Risks in the second half may come from a messy US presidential election, fresh US-China dispute, OPEC+ failure to implement supply cuts and above all, longer-than-expected breakthrough in COVID-19 vaccine development. Our baseline assumption is for a “manageable” second wave, if any. (Pages 2 to 5)

Malaysian Economy. The government is currently making good progress in its fight against COVID-19, presenting the country with a good chance of emerging amongst the first in ASEAN to recover economically and physically from the pandemic. This will put Malaysia on the radar of foreign investors, a significant development given that the country has been shunned since 2015. Their return could be accelerated should there be stability in government as well. Initiatives by the government are anticipated to keep the country’s growth momentum in positive territory nonetheless, albeit marginal at +0.3% for 2020. (Pages 6 to 9)

Market: What has driven the market’s solid performance since March, so much so that it is amongst one of the best-performing regionally? Fundamentally, the earnings picture (Table 4, page 11) looks horrible though expectations are for a sharp rebound in the coming year. Similarly, the current growth picture looks weak (Table 5, page 11) though there is also expectation of a sharp rebound next year.

Much of the recent months’ movements can be attributed to heightened retail participation in the market, ones who threw greater caution to the wind and picked up the slack from foreign investors’ incessant selling. Amply rewarded with a >25% gain since the trough in March, the million dollar question now is whether there is sufficient appetite for them to remain invested in the market, or to cash out? Preliminary evidence suggests the latter, particularly with various other parts (and alternatives) of the economy re-opening.

Perhaps less evident this year-to-date given their subdued participation rates (supplanted by retail investors’ robust 30%), net foreign inflows may just well be the next spark that the local bourse needs. The Malaysian market appears sensitive to foreign flows (Page 14). Why would foreign investors come back into Malaysia, especially when they have been net sellers in the local bourse 29 out of the last 35 months since August 2017? We suggest 2 fundamental reasons. (Pages 15 and 16).

The market remains highly susceptible to external shocks. It has been and will continue to be a trading-oriented one until the dust fully settles. Wild ups and downs are to be expected, which will present selective opportunities. While we think markets may continue to perform in the near- to medium-term on a liquidity-driven push, we retain our conservative stance and keep our 2020 year-end closing unchanged at 1,480 points as some fundamentals are reflected amid this current exuberance

We continue to like Johore Tin, Magni-Tech Industries, Mega First, Sarawak Plantations, Serba Dinamik, and SKP Resources. We suggest the inclusion of Chin Hin Group and D&O Green Technologies for the remainder of the year on basis of recovery in economic (construction and consumption) activity.

Source: PublicInvest Research - 29 Jun 2020

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