Near term heightened volatility inevitable on local bourse

WITH the national healthcare system being at breaking point following the recent surge in COVID-19 cases, speculation is rife that a “full MCO (movement control order)-style” lockdown could make a return soon.

Although no decision has been made as yet, Hong Leong IB (HLIB) Research has come out with some hypothetical-yet-insightful scenario of the impact in the event an MCO is declared.

The research house noted that the six purported MCO states – Penang, Selangor, Kuala Lumpur, Melaka, Johor and Sabah – make up 66% of gross domestic product (GDP) in 2019. For the record, the six states accounted for 84.4% of the total 119,100 COVID-19 cases from the “third wave” (measured from Sept 7 to Jan 7).

“Hypothetically speaking, the implementation of ‘MCO 2.0’ would pose a temporary setback to our 2021 economic recovery projections with the magnitude depending on duration and strictness,” rationalised HLIB’s head of research Jeremy Goh in a strategic note.

“However (again hypothetically), the impact should be less profound versus the previous MCO if done on a targeted approach.”

On the other side of the coin, the research house suggested that a “full fledge MCO” may perhaps still be avoided as Malaysia’s cumulative COVID-19 mortality rate of 0.50% is much lower than the (i) peak of 9.66% back in March last year and (ii) the global statistic of 2.91%.

On a brighter note, the very fact that the ringgit has regained strength since November (momentarily breaking below 4.00/US$ this week) is positive for the aviation, automotive and media sectors but negative for the export-related sectors (electronics manufacturing services, furniture, gloves and technology).

HLIB Research further expects Malaysia to achieve an immunisation rate of 20% by end-2021 with vaccine supply have been inked for circa 40% of the population thus far.

“While the overall 2021 recovery thesis remains intact, opposing news flow between vaccine roll-outs and a still rising COVID-19 count will bring about much volatility, perhaps also exacerbated by fluid politics and the regulated short selling (RSS) re-introduction,” opined the research house.

As such, HLIB Research keeps its end-2021 FBM KLCI target at 1,780 based on 19.3 times price-to-earnings ratio (PE) tagged to CY2021 earnings per share (EPS).

“Our top picks have a recovery bias (Tenaga Nasional Bhd, RHB Bank Bhd, DRB-Hicom Bhd, MBM Resources Bhd, and Focus Point Holdings Bhd), combined with volatility (Bursa Malaysia Bhd), defensive (Telekom Malaysia Bhd, MRCB-Quill REIT), value (IJM Corp Bhd, Sunway Bhd, Bumi Armada Bhd) and sold down pandemic beneficiaries (Top Glove Corp Bhd),” added the research house. – Jan 8, 2021

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