Country Focus

Although domestic economic recovery is underway, it may be uneven across sectors

Malaysia’s GDP is expected to expand to 6.0% in 2021 after an expected contraction of 5.5% in 2020. It is also expected to benefit from the 12th Malaysia Plan (12MP) in January 2021, where the government will likely announce more investor-friendly measures. These could potentially attract more foreign direct investments to further boost the economy.

Key downside risks for the country include it being tied to the global economic recovery pace, the containment of COVID-19 infections and domestic political uncertainties. Moreover, Malaysia has repositioned itself as a manufacturing hub in a bid to be a key player in the global supply chain; it wants to grab a share of the reshoring of manufacturing away from China.

We expect inflation to rise from -1.0% in 2020 to 2.1% in 2021, as the domestic economy recovers and commodity prices stabilise. The MYR is expected to strengthen further to 3.95 against the USD by Q3 2021, whilst BNM is expected to keep its OPR unchanged at 1.75% until Q4 2021.

Equities

With the impact and recovery from COVID-19 likely to be uneven across different sectors, investors need to be selective towards Malaysian equities. Value stocks within the Financial and Healthcare sectors are favoured, as growth equities have massively outpaced value-counters for several years, especially in 2020. Travel-related stocks could continue to face headwinds as long as COVID-19 remains undefeated.

Fixed Income

Based on a weaker USD backdrop and the US Federal Reserve’s (Fed’s) easing policy stance, the Malaysian bond market could continue to benefit from its relatively more attractive 10-year yield of 2.76% (Figure R2) compared with the developed markets, Singapore’s 0.87% and Thailand’s 1.31%. However, Malaysia has been on the FTSE Russell watch list for possible exclusion from its World Government Bond Index since March 2019, posing a key risk.

Currency

Broad USD weakness following a shift in the Fed’s policy approach, coupled with a firmer CNY and stable oil prices, should provide underlying support to the MYR. It is expected to strengthen to 4.03 against the USD by Q1 2021, and to 3.95 by Q3 2021.