Farah Adilla
KUALA LUMPUR: Hong Leong Investment Bank Bhd (HLIB) has revised its 2020 gross domestic product (GDP) forecast upward to a five per cent contraction from -6.0 per cent previously.
This takes into account sooner-than-expected domestic reopening and some government support in softening Covid-19's impact.
HLIB, in a report today, expects the second quarter (Q2) GDP to be the trough (-12 per cent to -15 per cent, before registering a shallower contraction in the second half of the year at an average of -4.2 per cent.
It also downgraded inflation forecast to -0.5 per cent year-on-year from 0.5 per cent.
"Despite the negative headline inflation, the share of consumer items recording price declines on a month-on-month basis is at 29.5 per cent, indicating that deflation is not across the board," it said.
HLIB said given uncertain growth prospects and muted inflation, Bank Negara Malaysia still has sufficient room to ease its Overnight Policy Rate (OPR) by another 25 basis points to 1.75 per cent in the second half of 2020.
Meanwhile, HLIB expects a pullback for Bursa Malaysia's benchmark FBM KLCI, after the index staged a strong rebound to peak at 1,575 points.
The pullback would owe to worsening Covid-19 tally globally, souring US-China relations and domestic political uncertainty.
Besides that, it said deteriorating Q2 corporate results, alongside worst-on-record quarterly GDP, should send a reality check.
HLIB said 27 per cent of companies within its coverage were expected to be in the red for Q2, increasing from 16 per cent in Q1 and six per cent in Q4 2019.
However, it expects the pullback to be less severe, unlike Q1, as liquidity factors would help cushion this.
"Domestic retail participation seems rejuvenated with retailers net buying RM6.5 billion in the first half of 2020, already more than doubling 2019's RM2.4 billion and 2020 average retail participation is at a decade high of 31.5 per cent," it said.
Externally, HILB said the US Federal Reserve's (Fed) "unlimited quantitative easing (QE)" arsenal could see some of this liquidity finding its way to emerging markets including Malaysia.
"The positive link between the Fed's balance sheet changes and net foreign flows to Bursa Malaysia was evident from second half of 2012 to end-2015, coinciding with QE3 (US' third round of QE) and its subsequent tapering/ halting," it said.
HLIB said during QE3, the FBM KLCI's price to earnings ratio rerated to 18.5x from 14.6x.
The firm maintained its FBM KLCI target at 1,460 points.