KUALA LUMPUR (Oct 13): The conditional movement control order (CMCO) in the Klang Valley will not have a major impact on business activities as firms are allowed to operate according to the standard operating procedures (SOPs) that have been rolled out for each industry, said MIDF Research. 

In a thematic report today, MIDF Research said it recognised that the major impact of the CMCO on the economy is weaker consumer spending and its spillover effects on the services industry, particularly consumer-related sub-sectors such as retail trade, restaurants, hotels, travel, education and recreation services.

“Having said that, in terms of economic growth, we expect the impact of the CMCO [and the weaker growth in the services sector] on national economic growth in 4Q20 (the fourth quarter of 2020) to be rather minimal. Hence, we maintain our gross domestic product (GDP) forecast of a -4.8% contraction for 2020,” said the research house.

MIDF Research believes that consumer spending will be supported by growing online purchases facilitated by the availability of e-commerce platforms, home delivery services and online financial services, including e-wallets and online banking.

It also said telecommunications services will also benefit from greater dependence on Internet services due to increased online purchases and employees shifting to a work-from-home arrangement

Given that the impact of the CMCO on the overall GDP will be limited, the research house expects that it will also have a limited impact on a sectoral basis.

However, it recognised that properties and real estate investment trusts (REITs) will be affected the most.

“On the supply side, the disruptive impact of the CMCO should be marginal as most economic activities will be allowed to continue as usual subjects of the prescribed SOPs. However, on the demand side, physical movement restrictions would adversely impact both the level as well as the variety of consumption activities,” said the research house.

Nevertheless, MIDF Research reckoned that the CMCO in the Klang Valley may alter the trajectory of Malaysia’s economic recovery in only a slight negative way.

“In this regard, the cascading impact on corporate earnings could also be marginal. The direct consequence of downward tweaks of forward earnings would [just] be a slight escalation of already-inflated equity valuations,” it said.

The research house maintained its FBM KLCI year-end 2020 target at 1,400 points, which equates to a forward-year price-to-earnings ratio of 15 times its 10-year (2010-2019) historical mean.

It believes that investors would need to select potential stocks with solid fundamentals, defensive earnings in nature and attractive dividend yields.

These stocks are Favelle Favco Bhd, UEM Edgenta Bhd, BIMB Holdings Bhd, Ranhill Utilities Bhd, Gas Malaysia Bhd, Tenaga Nasional Bhd (TNB), Top Glove Corp Bhd, Sunway Construction Group Bhd, IJM Corp Bhd, Dialog Group Bhd, Supermax Corp Bhd and Tasco Bhd.