It will be a long while before Singaporeans are able to cross the border into Malaysia. The country extended its near-nationwide movement control order (MCO) to Feb 18, with even stricter restrictions amid rising Covid-19 infection rates despite fresh curbs which took effect on Jan 13.
While the second round of restrictions — dubbed “MCO 2.0” — is less stringent than the restrictions put in place last year, it is still expected to hit Malaysia’s economy hard. As at Jan 22, all states in the country except Sarawak have been placed under the MCO. New confirmed Covid-19 cases continues to surge, reaching a record high of 5,725 daily cases on Jan 29.
Malaysia’s Senior Minister for Security Ismail Sabri Yaakob said on Feb 2 the government decided on the extension after a meeting earlier in the day concluded that all states under MCO are showing rising cases.
On Feb 4, more stringent protocols were rolled out for the Lunar New Year period. However, these rules were revised on Feb 7, following criticism from Chinese groups and politicians.
Overall, the outlook this year is “rough”, says Maybank Kim Eng group’s chief economist Suhaimi Ilias.
“But at the same time, we take the view that this outlook would be a function of three P’s — pandemic, politics and policies,” he says.
Suhaimi believes that these functions have been put in play now, to drive Malaysia’s economic recovery — even as the country goes through the pain of a second lockdown where almost all economic activities have ceased. Only five essential economic sectors are allowed to remain operational, namely factory and manufacturing, construction, trade and distribution as well as plantation and commodities.
The 3 Ps
The first P — pandemic — highlights the Covid-19 situation in Malaysia as it experiences its third wave of infections. But compared to the first MCO — which was imposed last year — the government is now allowing for a larger proportion of the economy to remain operational. Maybank Kim Eng says 78% of Malaysia’s economy remains open during MCO 2.0, compared to just 40% to 45% during the first MCO. This has resulted in a lower daily economic loss of RM0.7 billion ($230.47 million) to RM1 billion per day in MCO 2.0, as compared to RM1 billion to RM1.5 billion daily in the first round of restrictions.
Suhaimi predicts Malaysia’s 2021 GDP to show a modest 5.1% growth, less bullish than the official forecast of 6.5% to 7.5% growth and consensus expectations of 6.8% growth.
The second P — politics — comes as Malaysia’s King Al-Sultan Abdullah Ri’ayatuddin Al-Mustafa Billah Shah declared a state of emergency until Aug 1, alongside the implementation of MCO 2.0, to limit the Covid-19 outbreak. “I think, inevitably, there is an indication or view that the emergency proclamation is not just about dealing with the current state of healthcare crisis, but also political crisis,” says Suhaimi.
Malaysian Prime Minister Muhyiddin Yassin says economic activities will still continue to take place during the period of the national emergency. But there is criticism from certain quarters, charging that the lockdown will give the current government a stronger hold on the country. For instance, it can seek a more inclusive involvement from the private sector, including private healthcare facilities to help ease the burden of government agencies.
There will also be no parliament or elections during the duration of Malaysia’s state of emergency. Critics say this will allow for Muhyiddin’s Perikatan Nasional (PN) government — a coalition of the Malaysian United Indigenous Party, Malaysian Islamic Party and Gabungan Bersatu Sabah — to hold on to power a while longer. The Prime Minister assumed office in March last year and the present government has a wafer thin majority. “There is political uncertainty, instability and overhang” to watch out for, notes Suhaimi.
Finally, the third P — policies — is what Suhaimi notes the government is prioritising at the moment. “At this juncture, the government is obviously focusing on implementing measures. This includes the upcoming vaccination,” he adds.
On Jan 20, Malaysia’s central bank Bank Negara Malaysia (BNM) maintained its overnight policy rate (OPR) at 1.75% following the Monetary Policy Committee (MPC) meeting, as it sees continued recovery in the global economy, although downside risks remain amid uncertainties surrounding the pandemic.
On the back of the unchanged OPR, which was in line with Maybank Kim Eng’s predictions, Suhaimi is expecting inflation to make a comeback in Malaysia this year by some 2% after a deflation of –1% last year. “This means that real OPR will turn negative this year, up to around –0.25%, against a real positive OPR of 2.75% last year. This shows a 300 basis point cut in real OPR this year, compared to a 10 basis points reduction last year,” he adds.
Furthermore, Malaysia’s 2021 budget was passed in December last year, with the largest budget of RM322.5 billion being doled out. According to the Malaysian government, this extra additional spending would be funded through reprioritising government expenditures. “With that, I think that overall, the government fiscal policy remains expansionary and there is a continued large deficit spending,” notes Suhaimi.
Equities for the win
Although shrouded in uncertainties, Anand Pathmakanthan, Maybank Kim Eng’s regional head for equity research, believes the fundamentals for the equity market for Malaysia in 2021 remains quite good, giving the underlying basis for having a positive view on Malaysian equities for this year . These sectors include the glove, healthcare, tech as well as banking and finance.
Pathmakanthan notes that the “game changer” last year was not just the emergence of Covid-19, but also the announcement of the availability and efficacy of a vaccine towards the year end. “That was when markets really started taking off. And we expect that momentum to continue this year,” he continues.
However, 2020 was not a good year for foreign investments in Malaysia. According to data cited by Pathmakanthan, foreigners remained the net sellers for 17 months in a row. But he believes this is not a large concern as domestic institutions and with retail liquidity, the market can still move higher even if foreigners continue to sell in 2021.
Pathmakanthan notes that although interest rate cuts are not expected this year, the return of inflation means negative real rates are expected for this year, earnings growth can also be expected.
“Last year, the message was all about how far earnings can decline. But this year, the narrative is very different. It is all about earnings recovery and our analysts are looking at broad earnings recovery pretty much across all sectors in 2021 and by quite big numbers,” says Pathmakanthan, who has forecasted total earnings in 2020 dropped 11%, and grow between 20% and 45% this year.
Themes to watch
There are some themes to lookout for this year that will drive the Malaysian equity market. Firstly, Pathmakanthan notes that interest rates are very low this year. Hence, yield stocks are looking rather attractive.
With the ongoing US-China trade war, there has been some supply chain relocation. More specifically, the Malaysian tech companies, such as Greatech Technology and VS Industry, are seeing more customers from the US, as they move more orders to this part of the world and further away from China.
Another investment theme to look out for is mergers and acquisitions (M&A). Pathmakanthan expects more M&A deals this year because funding is very cheap and some of the very asset-heavy sectors like property and plantations have not really performed very well. “A lot of the assets are below book value or below replacement costs, and that’s very attractive for acquirers,” he says.
Environmental, social and corporate governance (ESG) is another theme to note. In the past year, Malaysia has not been in the best place in terms of ESG headlines, with the plantation, glove making and energy industries coming under the microscope for below par ESG practices. Pathmakanthan prefers stocks that maintain strong ESG criteria such as Hartalega Holdings — compared to Top Glove, which has been facing issues with foreign labour.
“Examples around the world [show the importance of ESG], such as oil and gas companies that switch into renewables are where people make a lot of money because the ESG credentials improved dramatically. The stocks become much more investable. This is something even I keep an eye on quite closely myself,” he adds.
