Malaysia Market Focus - Malaysia Strategy (8 July)

Industrial Insight > Malaysia Market Focus - Malaysia Strategy (8 July)
8 July 2020
By AllianceDBS Research

Rising liquidity tide. Equity market sentiment may continue to remain buoyant in the near term fuelled by the surge in liquidity. However, the end of the six-month loan moratorium by September 2020 may lead to liquidity in the equity market normalising. As such, we believe the liquidity-induced equity market rally may not be sustainable. In addition, the absence of credible earnings growth trajectory is likely to undermine the rise of our benchmark index. We revise our end-2020 KLCI target to 1,480, pegged to 16.8x CY21 earnings (long-term mean of 12-month rolling forward PE). There could be more earnings downside risk if the anticipated recovery in 2H20 and 2021 comes weaker than expected.

Malaysia political manoeuvres the key focus. On the domestic front, there is talk that a snap general election could be held in view of the razor-thin majority held by the ruling coalition government. The upcoming Parliament sitting from 13 July to 27 August would shed more light on the political direction which would impinge on the measures to mitigate an economic downturn in Malaysia. While the lockdown measure has been eased, economic headwinds remain, arising from a high unemployment rate, weak eternal and domestic demand, and persistently poor consumer sentiment.

Government spending to spur growth. We foresee opportunities in selected themes and sectors. We expect more apparent positive newsflow on construction projects in 2H20 with the tabling of Budget 2021 in November 2020 to be key for the revival of MRT 3, High Speed Rail and other potential new PFI projects. Our top sector pick: Gamuda (GAM). We also expect a flurry of awards in Sarawak leading up to the State elections (by September 2021); SCIB (Not Rated) is a potential beneficiary. Post-pandemic demand recovery given the easing of lockdown should benefit companies such as Malaysia Airports (MAHB) and Genting (GENT) that have been badly hit by COVID-19 with much better expectation in 2021. The increase in demand for data is positive for Time dotCom (TDC) while VS Industry (VSI) is a US-China trade diversion beneficiary. We also remain keen on stocks with resilient business models and high-yielding names which are more likely to outperform in a low interest rate environment such as Sunway (SWB), TSH Resources (TSH), Bermaz Auto (BAUTO) and Magnum (MAG).

Market outlook

Uncertainties remain. As the Covid-19 pandemic remains unabated with a record high number of daily infections in recent weeks after the easing of lockdown measures globally, a deeper global recession is looming. The International Monetary Fund and the World Bank have both projected the global economic output to shrink by 4.9% and 5.2%, respectively, which will mark the deepest global recession in decades, despite the coordinated efforts by governments to stimulate their economies with both fiscal and monetary policies. Nevertheless, the dire outlook remains subject to a great deal of uncertainties which could further result in additional downside risks to the global economy.

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