PETALING JAYA: The stock market could potentially see more losses in the coming months due to the multiplier effect of economic consequences from the coronavirus pandemic.
TA Securities head of research Kaladher Govindan said at the moment, the full impact of the coronavirus pandemic is not visible yet, and without a vaccine, economic activities are unlikely to be the same even after lockdown is lifted.
“After the movement control order (MCO) is lifted, we may see the carnage on consumer and corporate such as unemployment, pay cuts, retrenchments and company closures, which will impact many sectors negatively, ” he told StarBiz.
He said many businesses are running low on cash and are on “the verge of collapsing.”
To cope with the situation, businesses would need to rethink and re-engineer their business models, otherwise they will fail.
“For instance, travel, entertainment, hospitality and services that rely on people and discretionary retail will have tough times.
“Their failure will add to the strain on the banking system in the form of non-performing loans and higher provisions but also unemployment, ” Kaladher said.
Aside from shrinking economic activities, the consequences of the MCO is the rise in the unemployment rate. Kaladher said higher unemployment would have an impact on consumption and private investments which would affect the economy negatively.
“It also involves social costs in the form of erosion of skills, mental agony, destruction of family units, higher crime rate and, unproductive payment of government benefits, ” he said. Earlier, Prime Minister Tan Sri Muhyiddin Yassin said the Malaysian economy loses RM2.4bil in revenue every single day under the MCO. The MCO, which is supposed to end on April 28, has been extended to May 12.
As of yesterday, Malaysia has been on its 46th day of the MCO, which is equivalent to RM110bil in losses in revenue to the Malaysian economy. To cope with the economic fallout, the government has announced a stimulus package worth RM260bil in line with other economies around the world.
Kaladher expects the market correction would come in August, pricing in the impact of MCO on the economy and stock market.
The FBM KLCI has rebounded more than 13% from its recent low of 1,220 on March 19. On a year to date basis, the benchmark index FBM KLCI is down more than 13% following weeks of rally as investors betting on a quick recovery in the economy.
According to analysts’ consensus, corporate earnings are set to shrink by 6.5% this year.
Kaladher pointed out that the aviation sector will be the most affected sector due to lower passengers and mark-to-market losses from fuel hedging.
Meanwhile, glove manufacturers will do well in the current environment due to the growing demand led by the coronavirus outbreak. His target for the FBM KLCI index was 1,450 points by the end of the year based on a price-to-earnings valuation of 15 times.
Despite the gloomy picture, there are pockets of opportunity in the market.
Kaladher said investors looking for long term investments should consider companies that have good cash flow and low gearing that could ride the current volatility.
“But I would suggest investors wait, ” he said.