Lower consumer spending may affect earnings


Limiting impact: Containers are seen at North Port in Port Klang. The introduction of CMCO, instead of a more restrictive targeted enhanced movement control order, has limited the impact to Malaysia’s GDP overall.

PETALING JAYA: The growth forecast for the Malaysian economy has been downgraded by CGS-CIMB Research following the government’s decision to enforce conditional movement control order (CMCO) covering Selangor, Kuala Lumpur and Sabah from Oct 14 to 27.

The research house now expects the gross domestic product (GDP) to contract by 4.4% this year compared to its earlier projection of a 4% contraction.

The downward revision also took into account economic data disappointments in the July-August period that may likely impact the third quarter GDP results.

A two-week CMCO will shave off 0.18 percentage points (ppt) from the October GDP.

“Each incremental two-week extension of CMCO beyond Oct 28 subtracts a further 0.18 ppt, ” it estimated.

Limiting impact: An aerial view of North Butterworth Container Terminal in Butterworth. The introduction of CMCO, instead of a more restrictive targeted enhanced movement control order, has limited the impact to Malaysia’s GDP overall.Limiting impact: An aerial view of North Butterworth Container Terminal in Butterworth. The introduction of CMCO, instead of a more restrictive targeted enhanced movement control order, has limited the impact to Malaysia’s GDP overall.

Meanwhile, data disappointments in July to August are expected to drag down the third quarter GDP by 0.25 ppt.

According to CGS-CIMB Research, the CMCO announcement will dampen market sentiments due to concerns that corporate earnings recovery could disappoint due to lower consumer spends.

“The affected states collectively accounted for 46.6% of Malaysia’s GDP in 2019, Selangor with 24.2%, Kuala Lumpur and Putrajaya with 16.4%, and Sabah 6%.

“Policy response to arrest the further slide in economic momentum may be forthcoming, although in more measured doses, as we expect CMCO 2.0 to be brief.

“We do not discount the possibility of Bank Negara cutting the overnight policy rate (OPR) by 25 basis points next month versus our initial forecast of an extended pause in OPR cuts, ” the research house stated in a note.

Based on preliminary assessments, CGS-CIMB Research further pointed out that the CMCO would negatively impact several sectors namely brewery, construction, consumer, gaming, real estate investment trusts (REITs) and transportation.

Banks could also potentially be affected if the OPR is slashed further in view of the impact from the recently-imposed movement restrictions.

“Overall, we do not expect the CMCO to significantly impact FBM KLCI earnings if it is not extended beyond two weeks and to the rest of Malaysia.

“We maintain our FBM KLCI target of 1,520 points (based on an unchanged 16 times forward price-to-earnings ratio) as most of the FBM KLCI constituents’ earnings are not expected to be significantly impacted by this news, ” said CGS-CIMB Research.

In a separate note, MIDF Research said the introduction of CMCO, instead of a more restrictive targeted enhanced movement control order (Temco), has limited the impact to Malaysia’s GDP overall.

“We expect the CMCO in the Klang Valley will not have a major impact on business activities as we expect firms to be allowed to operate with the standard operating procedures.

“However, the major impact of CMCO on the economy is mainly from weaker consumer spending and its spillover effect to the services industry, particularly consumer-related sub-sectors such as retail, restaurants, hotels, travel, education and recreation services, ” it said.

MIDF Research said it has maintained its GDP forecast of negative 4.8% for 2020.

The research house believes consumer spending will continue to be supported by growing online purchases facilitated by the availability of e-commerce platforms, home delivery services and online financial services, namely e-wallet and online banking.

“Telecommunication services will also benefit from the increased dependence on Internet services due to increased online purchases and employees shifting to work-from-home arrangement, ” it said.

However, the research firm recognised that some sectors would be more affected than the others. Properties and REITs are expected to be affected the most.

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