Looking Ahead To Better Days
The Covid-19 pandemic is close to reaching an endemic phase in Malaysia, with many resigned to the fact that the virus will be a constant presence in some capacity. And as the Ministry of Health Malaysia spearheads a vaccination campaign that has seen a total of 75% of the population fully vaccinated, including 95% of adults, hopes are high that the Malaysian economy will recover as workplaces begin to welcome employees once more.
COVID-19 STILL AFFECTING THE MARKET
Although we may be moving towards an endemic phase, the presence of Covid-19 still looms like a dark cloud on the horizon. However, the effects of the pandemic are more indirect this year compared to the chaos caused in 2020. The delays in vaccinating many parts of Asia led to delays in workplaces reopening, disrupting supply chains in various industries.
“In Malaysia, we have been impacted similarly by lockdowns till recently,” says Sammeer Sharma, head of consumer, private and business banking at Standard Chartered Malaysia.
A shortage of coal supply led to power loss in parts of China, while shipping containers have been held up at ports due to quarantine restrictions. There has also been a shortage in semiconductor chips worldwide; this led to a cutback in production of cars, smartphones and computer graphics cards to name three industries.
“These will derail part of company earnings and push up inflation temporarily and we have been seeing some of these effects play out,” he explains.
However, it is not all doom and gloom. The increase in vaccination rates both in Malaysia and abroad is good news for previously closed sectors. Sharma predicts that the retail, real estate, aviation, tourism, and food and beverage industries will edge towards recovery as countries begin to open up and return to a sense of normalcy.
REOPENING TO BOOST RECOVERY
According to the Ministry of Finance Malaysia (MOF), unemployment improved to 4.8% in July 2021 compared to 5.3% in May 2020. MOF attributes the improvement in economic indicators to the implementation of “various stimulus and assistance packages”. There was a strong rebound in the monthly gross domestic product (GDP) growth which improved to 40.1% and 19.8% in April and May this year, up from a drop of 28.8% back in April 2020.
Although the third Movement Control Order in May led to GDP growth declining by 4.4% in June, the market outlook is currently optimistic with the order now lifted and the country edging back to normalcy once more thanks to an adult vaccination rate of over 95% according to MOH.
This aligns with the views of Sharma, noting that the reopening of the economy should lead to a boost to the broad economy as well as employment rate, calling it “pivotal to sustain consumption spending to extend the recovery momentum”.
“Reopening creates new employment which augurs well to boost savings level, which has been depleted in the last 18 months, among the B40 and part of M40,” he explains.
Optimism for a recovery is not just confined to these shores. The World Bank raised its 2022 economic growth projection for Malaysia to 5.8% from 4.2% previously, while the Organisation for Economic Cooperation and Development (OECD) also forecasts growth of 6.1% in 2022.
MARKET OUTLOOK FOR LOCAL INVESTORS?
“There has been huge focus on the rollout of 5G by end of this year in Malaysia and recent attention to rising energy and commodity prices are supportive. For example, Malaysia crude palm oil is trading near historical high,” he adds, citing the current RM4,900 versus the peak of RM5,100.
According to Sharma, local investors can ride the trend of 5G and energy transition given the high energy prices, adding that about 30% of new fund inflows for Standard Chartered can be chalked up to sustainable investments.
“We see continuous inflows into these sectors in the coming months,” he predicts.
For investors looking abroad in 2022, Sharma believes “exposure via USD-denominated bonds may be attractive”, citing a preference for Asia USD bonds in high yield (HY) debt instead of investment grade.
“While Chinese equities’ valuations may have eased during the sell-off, unlike HY bonds, they remain some distance away from inexpensive levels. Asia HY bonds, meanwhile, appear to offer value even without distressed developer’s bonds which form a significant portion of the index.”
He adds that there are signs of “growing confidence in the economic recovery momentum”, citing central bank bond purchase tapering and rising expectations of policy rate hikes across developed economies, such as the US and UK.
“Global equities and riskier bonds are likely to remain well-supported on a 6 to 12-month horizon in this environment as inflation-adjusted interest rates stay low, or negative,” says Sharma.
“We retain a preference for US and Euro area equities. Value stocks, which includes energy, industrials, financials would likely outperform in the coming months as more economies reopen with more capex spending and interest rate normalising.”