MIDF Research remains sanguine of the prospect of the economy and equity market in 2022, with domestic demand expanding to drive economic recovery after disruptions this year.
Nevertheless, MIDF Research recognizes several downside risks that started in 2021, which may spill over into 2022 and disrupt the global growth outlook.
After many false starts this year, Malaysia’s economy has begun its recovery process. Whilst the expected recovery this year was delayed due to the resurgence of Covid-19 cases caused by the Delta variant, the situation faced this year has been very much different from the one faced last year.
One key difference is the discovery and availability of the vaccine. The country’s high vaccination rate has allowed the Government to reopen the economy and restart the recovery process after numerous prolonged lockdowns.
“Although we are sanguine of the prospects of recovery next year, we are cognizant that several issues seen this year might spill over into 2022 causing some possible negative impacts. These include, (1) the recent discovery of a new some possible negative impacts (example: Omicron), (2) Incessant inflationary pressures; (3) pullback in China’s property market; and (4) possible 15th general election in Malaysia. In our base-case scenario, even though the occurrence of any of these events, either in isolation or in combination will not derail the recovery process.
“Having said that, the possibility of these events turning out worse than expected cannot be discounted given our experience this year. Therefore, investors need to be over vigilant of the possible downside risk next year.
“Malaysia’s economy returned to negative growth in 3QCY21, with real GDP declining by -4.5% due to the impact of the full lockdown which caused domestic spending and business activities to weaken. Resultantly, we now forecast Malaysia’s growth for this year to be at +3.7%.
For 2022, we opine the continued recovery in the domestic economic activities to continue as both consumers and businesses will increase their spending because of a better outlook,” said the analyst firm.
The Government’s spending will also contribute positively to growth, given the expansionary Budget 2022 and record-high allocation for development expenditures. In addition, the continued growth in external demand will continue to grow stronger at +6% in 2022. Meanwhile, the Ringgit is expected to appreciate against US Dollar, from MYR 4.09 to USD 1 by the end of 2022.
Inflation is anticipated to be at 2.1% year on year. With the economy expected to recover and inflationary pressure to return, MIDF Research also expects Bank Negara to undertake a rate hike of 25 basis points in the second half of 2022.
In the equities market, it is not surprising that the FBM KLCI has been laggard when compared with the performance of other regional peers as the local benchmark was hit by both external and domestic concerns in2021. As of 2 December 2021, the index has fallen -7.7% on a year-to-date (YTD) basis.
In terms of foreign fund flows, the Malaysian equities market saw the return of foreign funds. From August 11, 2021, until December 2, 2021, net inflow by foreign funds amounted to RM3.61 billion, resulting in paring of its net selling position.
“Going into 2022, our baseline scenarios are; (1) liquidity situation remains sufficiency ample but with a monetary policy on a moderately tightening path; (2) any upsurge in COVID-19 cases could lead to the re-imposition of some containment measures but would not result in nationwide lockdowns due to the high level of vaccination rates’ (3) the authorities in China would be pro-active in handling its property market situation and pull out all the stops to avoid a systemic fallout thus limiting the risk of cross border contagion; (4) general election, if called, may not result in negative price action post-election. We expect the emerging virtuous dynamics in the real economy would eventually be mirrored the financial economy. We believe that these factors will affect investors’ sentiment positively leading to better performance of our equity market, and also of our regional peers.
“MIDF Research also expects commodities prices to remain elevated despite normalizing. We forecast Brent crude oil price to average at USD75 to USD80/barrel and crude palm oil to average at RM3,300/MT.
“MIDF Research’s FBM KLCI target for 2022 is at 1,700 points, at an implied PER of 16.5x which equates to its 10-year historical average,” it says.
Speaking at the event at the Menara MIDF, Kuala Lumpur were:
Syed Muhammed Kifni Syed Kamaruddin, Director, Research
Imran Yassin Md Yusof
Director, Head of Research
Abdul Mu’izz Morhalim
Associate Director, Research