THE world was more than ready to bid 2020 adieu. It did not turn out the way anyone would have predicted at the start of the year, to put it mildly, bountiful for some and financially painful and tragic for others but certainly shocking and lifestyle-changing for all.
Yes, the Covid-19 pandemic that created massive disruptions, havoc and death across countries is still raging and, for many, the outbreak is at the worst that it has ever been. But as the saying goes, it is always darkest just before the dawn.
The depth and breadth of the economic destruction from the pandemic is the worst the world has experienced since World War 2. Global gross domestic product is forecast to contract by 4.4% in 2020. For perspective, global GDP fell 1.7% in 2009, at the height of the global financial crisis. Almost every major country is expected to report a deep recession in 2020, save for China, which is projected to grow 2%, the weakest since the end of the Cultural Revolution in 1976. Around the world, millions of people have lost jobs and millions more their livelihoods.
Yet, through this extremely challenging time, we witnessed the strength of humanity’s adaptability and innovation — and resilience.
Businesses unrelated to healthcare started producing personal protective equipment just weeks into the outbreak. Many small and medium enterprises embraced e-commerce for the first time, leveraging social media and changing their business models in the new operating environment.
Critically, the world’s scientific community collaborated as never before — China shared the whole genome sequence of the novel coronavirus as early as January 2020 — and successfully developed and delivered highly effective and safe vaccines in just months, for a process that would typically take years. The vaccine is, without a doubt, the light at the end of this proverbial tunnel.
These are the reasons why we firmly believe that the world will rebound and that this year, 2021, will be a much better year.
Progressive vaccination of the world’s population will underpin the global economic recovery. Importantly, it will be a synchronised global economic growth — the mirror image of the simultaneous pandemic-driven global economic shock and contraction in 2020.
Vaccinations will kick-start economic normalisation and growth
Clearly, countries that quickly and successfully vaccinate and achieve herd immunity for their population — and are therefore able to normalise economic activities — will see faster recoveries. These countries will also gain from being able to safely reopen international borders to investments, travel and tourism.
Singapore will most likely be one of the first countries to achieve economic normalisation in the world, given its early vaccine acquisitions — it had already started inoculations in the closing days of 2020 — relatively small land area and population, excellent healthcare infrastructure and, more importantly, the people’s cultural background. As we have written before, cultural practices have played a key role in why many Asian countries have contained the outbreak better than developed countries in the West. Vaccines may be available but people still have to choose to take the jab for immunisation to work.
We hope that Malaysia will follow closely behind with a speedy nationwide vaccination programme rollout. Obviously, the matter is of great urgency in view of the high case numbers currently. Many businesses are struggling and the longer the pandemic drags on, the more people will lose their jobs and the greater the damage will be to the economy.
Immunisation of the population is the only way to kick-start the normalisation process and sustainable, full-scale economic recovery, which has endured fits and starts over the past year.
To be sure, we are as yet uncertain how long the vaccine protection will last and when the virus will mutate, as all viruses do. But we can be certain that the vaccines will continue to improve in the future and keep Covid-19 in check.
Concerted global economic recovery to drive exports
This normalisation and economic recovery process will play out in every country across the globe, some at a faster pace, some slower. But most of the world, we believe, should be well on the path of growth by 2H2021.
It is important to bear in mind that this synchronised economic growth will be supported by extremely accommodative monetary policies as well as concerted and massive fiscal stimulus packages, a key ingredient that was largely missing in the post-global financial crisis recovery. Governments across the board are running big deficit spending, even in traditionally tight-fisted countries such as Sweden and Germany (see Chart 1).
Plus, there will be significant pent-up consumer demand. We would imagine everyone is raring to dine in a restaurant, go to the movies, travel for a holiday, meet up with friends and family in person, and so on.
In other words, we expect the global economy to fire on all cylinders. The International Monetary Fund forecasts global GDP growth at 5.2% in 2021, which will be the strongest in more than four decades (see Chart 2).
Globally, the manufacturing sector rebounded quickly after the initial steep contraction resulting from the abrupt halt in activities owing to lockdown measures. In fact, global manufacturing output has recouped all lost ground and more, growing by 0.2% year on year (y-o-y) in October 2020 (see Chart 3).
The robust global economic recovery and stronger consumer demand will boost Malaysia’s exports sector, one of our key drivers of growth.
China, the country’s largest trading partner, is forecasted to grow by 8.2% this year, the strongest among major economies in the world. This bodes well for global and regional trade.
Indeed, exports of manufactured goods have recovered quite smartly in 2H2020, following the brief and sharp decline in 2Q2020, underpinning the recovery in Malaysia’s exports. This has more than offset weakness in demand for commodities, leading overall y-o-y exports growth back into positive territory (see Charts 4 and 5). We expect exports to continue to gather steam through 2021.
Malaysia’s manufacturing sector is seeing some positive spillover from the US-China trade war, as businesses diversify-relocate from bases in China. This trend is likely to persist over the coming years.
Moreover, we expect to see stronger recovery in commodity — oil and gas as well as crude palm oil (CPO) — exports this year, underpinned by both global demand recovery and weakness in the US dollar.
CPO prices have already rebounded, from the average of about RM2,100 per tonne in 2019 to RM2,800 per tonne in 2020. Currently, spot CPO is a hair’s breadth away from RM4,000 per tonne while the benchmark futures are hovering well above RM3,800 per tonne. While prices may come off from these levels, we think they will average higher in 2021.
Higher prices coupled with volume demand recovery — export volume declined 7.8% y-o-y for the first 11 months of 2020 — will translate into higher export sales for Malaysia in 2021.
Meanwhile, crude oil prices too have recovered much lost ground and are currently hovering above US$54 per barrel, compared with the lows of less than US$20 per barrel in April 2020 and average of roughly US$43 per barrel in 2020.
Pent-up demand and services sector recovery will drive domestic consumption higher
Rising exports will filter down the domestic economy and spur consumption. Better demand for manufacturing may boost employment and wages while stronger CPO prices will improve disposable incomes for farmers in the rural areas.
We believe large segments of the population have “excess” savings from 2020, due in part to loan moratoriums and limited avenues to spend with restrictive movement measures and closed borders. Hence, we are likely to witness the benefits of pent-up demand this year.
Services, especially those that require physical and personal interactions related to travel — tourism and hospitality — bricks- and-mortar retail as well as F&B, were the hardest hit during the pandemic. We expect to see a strong rebound for the sector through 2021 with vaccinations, and once people are confident, they can safely resume their pre-pandemic routines.
Case in point, the recovery in credit card spending was gaining momentum until it was hit by the latest resurgence in Covid-19 cases and subsequent retightening of restrictive movement measures. Similarly, retail and wholesale trade numbers recorded marginal positive y-o-y growth in September before weakening anew (see Charts 6 and 7).
These charts underscore how important it is for Malaysians to get their vaccinations as quickly as possible, to enable a sustainable economic recovery.
Government development spending and private capex will recharge investments
Increased government spending is yet another key driver for growth in 2021. Malaysia has allocated a record RM322.5 billion for Budget 2021.
That includes RM69 billion for development expenditure, compared with RM56 billion in Budget 2020. We think that the actual amount spent was much lower last year, due to the pandemic and restrictive movement measures. As at 3Q2020, only about RM30 billion had been spent. In effect, this would mean a significant increase in the amount to be spent — and therefore, its impact — this year compared with 2020.
Meanwhile, monetary policy is expected to remain accommodative. Bank Negara Malaysia had cut its policy rate to 1.75% by end-2020, down from 3% at the start of the year. Lower borrowing costs should help spur investments in the country, especially for information technology (IT).
Businesses will jump on the digital economy bandwagon faster than most would have before the pandemic. Secular trends such as e-commerce and multichannel distribution networks, cashless payment, digitisation and migration to cloud have proven to be key to future competitiveness and survival.
While 4G has been a boon for consumers, high-speed and low latency 5G networks will greatly benefit the industrial sector and enterprises. At the very low end, digitisation will translate into greater cost savings and enhance efficiency and productivity for businesses.
From a broader perspective, 5G is the building block for increased automation and the use of robotics, augmented and virtual reality, artificial intelligence and machine learning, Internet of Things devices, autonomous vehicles, smart buildings and smart cities, and so on.
The potential is massive and we expect to see businesses rapidly capitalise on these trends with new digital applications and services.
Similarly, there is much to gain from the consolidation of big data on a single integrated nationwide digital platform for all government agencies and public services. A convenient and transparent regulatory-approval ecosystem will do away with bureaucracy and corruption, and enhance public trust in the government.
If anything, the Covid-19 pandemic has proven how significant a role IT has in effectively executing public policies. A case in point: Taiwan successfully contained the outbreak with almost no economic damage — all the while maintaining among the least restrictive measures in the world — through the extensive use of IT. The country has integrated various platforms into a single system that provides real-time access to patients’ health records, travel and contact histories, clustering at mass gatherings in real time, rapid and accurate diagnostic imaging and even the rationing of surgical masks.
Hence, we anticipate accelerated public-private sector investments in digital infrastructure to support high-speed internet connections, including backbone infrastructure such as submarine cables and fiberisation as well as 5G mobile networks, data centres and cloud services.
Indeed, investments in digital infrastructure will form a major part of fiscal stimulus packages around the world, next to traditional infrastructure such as rails and roads. Make no mistake, digital transformation is a secular trend that will play out in the foreseeable future.
Cultivating a robust digital ecosystem will create new and higher-paying jobs, not only to replace those that will inevitably be lost during the digital transformation, but will also lift Malaysia towards its ambition of becoming a high-income nation.
Bullish on outlook for stocks
It is clear that the outlook for 2021 is very positive — we have all the makings of a robust and synchronised global economic recovery and growth. Global markets have already been pricing for this recovery growth as evidenced by stocks’ strong upwards momentum. Markets are always forward looking — and almost always right.
We are bullish on stocks. The economic recovery will support strong earnings growth in 2021 and bring valuations down to more attractive levels.
Lower-for-longer interest rates will see increasingly more investors turning to stocks for better returns while receding fears and uncertainties over the pandemic should lead to a bigger appetite for risk. And as we know, low interest rates and low perception of risk are the ultimate boost for equity valuations.
Coupled with persistent weakness in the US dollar, we believe these factors will reverse last year’s foreign money outflows from emerging markets.
The rally last year was driven primarily by retail investors, leading to a strong momentum and gains for smaller-cap stocks. The FBM KLCI, on the other hand, was only up by 2.4%. The return of foreign funds to Bursa Malaysia will drive prices for larger-cap stocks higher. Historically, movements in the broader market are closely correlated with net foreign fund flows (see Chart 8).
Politics is the biggest risk for Malaysia
The biggest risk for Malaysia today is politics. Since the 14th general elections in 2018, the country has been continuously beset by political wrangling and power jostling by the various political parties and their key leaders, as no one party has the outright majority. Infighting in the Pakatan Harapan coalition resulted in the wholesale changes in governing at both state and federal levels, after only 22 months in government.
The current ruling Perikatan Nasional coalition, too, appears to be on shaky ground. In the latest development, Umno leaders have called for snap elections, well before the next general election is due in 2023.
Once upon a time, political succession in the country was as predictable as those of hereditary kingdoms. But this lack of change resulted in outright rent seeking, abuse of power, corruption and contempt for governance and transparency.
Today, the constant change and threat to stability pose the biggest risks to investors. We know that all change causes pain. The question is whether it will do more good than bad.
The year 2020 brought much despair to many. We really do not need more for 2021. To quote Winston Churchill, “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”