KUCHING: Malaysia’s movement control order (MCO) will be good for health, but not for the business community, particularly companies categorised as ‘non-essential services’, analysts observed.

To recap, Prime Minister Tan Sri Muhyiddin Yassin announced last week that the country will undergo a MCO from March 18 to 31, 2020.

“Though a necessary course of action, we note that the restriction will possibly cause consumers to be more prudent on their spending while companies categorized as ‘non-essential services’ will be negatively affected by the 14-day period business closure,” Affin Hwang Investment Bank Bhd’s research team (Affin Hwang Capital) said in a recent FBM KLCI ETF report.

“We believe sectors like gaming, retail real estate investment trusts (REITs), consumer retailers, property and automotive sellers will be most impacted by the business closure.

“Hence, there is further downside risk to company’s earnings.”

According to Affin Hwang Capital, Covid-19 has taken a toll on the global equity markets which is starting to feel the sting of production supply disruptions, lost man-hours and weaker consumption spending, especially now that the virus outbreak has turned into a pandemic.

“The Covid-19 coupled with the recent oil price crisis contributed to the heightened equity market risk premium in the recent weeks.”

Therefore, Affin Hwang Capital has made a downward revision in its 2020 gross domestic product (GDP) estimates to 3.3 per cent from previous four per cent while also cutting its corporate earnings growth from 1.3 per cent to minus 4.7 per cent.

The research firm expected further downside to this view should the Covid-19 pandemic prolong.

Affin Hwang Capital’s Economics team is currently forecasting the first quarter of 2020 (1Q20) GDP growth to decelerate to 2.5 per cent from 3.6 per cent in 4Q19.

“We found that even though the long-term correlation between GDP and KLCI Index is low at 0.25, in times of economic slowdown, the correlation spikes to 0.7 to 0.8.

“We believe the GDP could be the precursor for a further de-rating of the market. Any further selldown in the global equity markets, as it digests a global slowdown, will likely worsen the performance of the KLCI.”

All in, Affin Hwang Capital lowered its KLCI 2020 year-end target to 1,200 based on 14-fold price earnings (PE) multiple, based on -1 standard deviation (SD) to the KLCI’s long term 15-year mean PE, from 17-fold previously.

The research firm cut its KLCI earnings per share (EPS) forecast to a 4.7 per cent decline, reflecting its GDP growth cut to 3.3 per cent from four per cent previously.

“In a worst case bear scenario, we believe the KLCI could retest negative 2SD, which could bring it down to the 962 levels. In tandem, we lower our ETF KLCI fair value to RM1.18.”


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