Highlights

• Budget 2020 promotes responsible growth, addresses the rakyat’s welfare (including fostering home ownership), champions diversity (prosperity to be shared across ethnicities, genders, income groups and regions) and future-proofs the nation with heavy emphasis on the development of a digital and knowledge-based economy.

• These budget goals will be achieved without digressing from the commitment towards fiscal consolidation, although Budget 2020 does revise the deficit target slightly higher to 3.2% of GDP (vs. 3% projected during Budget 2019). Nonetheless, this is still an improvement over an estimated deficit of 3.4% in 2019.

• The rakyat’s welfare will be safeguarded by cash grant scheme Bantuan Sara Hidup (expanded to cover more individuals), increase in the monthly minimum wage to RM1,200 from RM1,000 in major cities, special payments to civil servants and pensioners of RM500 and RM250 respectively and a new targeted fuel subsidy scheme.

• Budget 2020 fosters home ownership by providing guarantee to financing for first-home purchase of up to RM500K through the rent-to-own (RTO) scheme and a monthly instalment assistance of RM200/month during the first two years under a Youth Housing Scheme. It also attempts to help resolve the supply overhang issue in the property sector by lowering the threshold for foreign ownership of condominiums/apartments in urban areas to RM600K from RM1mil.

• To hasten the transformation into a digital and knowledge-based economy, Budget 2020 offers grants for the development of the 5G ecosystem, broadband access via satellite technology to remote areas, digital infrastructure in public buildings and digital projects such as drone carriers, self-driving cars and blockchain technology. It also hopes to accelerate the adoption of e-payment by providing a one-off e-wallet incentive of RM30 which could benefit up to 15mil citizens.

• Sector-wise, the more apparent winners are consumer (cash grants and fuel subsidies) and property (governmentguaranteed RTO scheme and lower price threshold for foreign ownership) sectors.

• On the other hand, we believe the biggest disappointment belongs to the construction sector. While gross development expenditure is projected to increase by 4.3% to RM56bil in 2020 from RM53.7bil estimated for 2019, there is a lack of initiatives to embark on new mega infrastructure projects (typically funded with special purpose vehicle or SPV debts). As development expenditure typically goes towards funding basic infrastructure projects such as roads, bridges, schools and water supply projects, these will largely only benefit smallish/unlisted contractors.

• We maintain our end-2019 FBM KLCI target of 1,680pts based on 17x our 2020F earnings projection (+7.9%), which is at a discount to its 5-year historical average of about 18x. We believe the risk-off trade will prevail over the rest of 2019. Investors are likely to continue to lighten their positions in high-risk asset classes, i.e. equities and emerging market (EM) assets, while seeking refuge in safe-haven asset classes, i.e. developed market (DM) bonds and even zero-yielding precious metals.

We maintain our end-2019 FBM KLCI target of 1,680pts

• We maintain our end-2019 FBM KLCI target of 1,680pts based on 17x our 2020F earnings projection (+7.9%), which is at a discount to its 5-year historical average of about 18x. We believe the risk-off trade will prevail over the rest of 2019. Investors are likely to continue to lighten their positions in high-risk asset classes, i.e. equities and emerging market (EM) assets, while seeking refuge in safe-haven asset classes, i.e. developed market (DM) bonds and even zero-yielding precious metals.

• Typically, an easing cycle in the US shall usher in a new capital inflow cycle to EMs, including Malaysia, as investors step up the hunt for yield. This was the case in June and July 2019 when EM bond funds and Malaysian Government Securities (MGS) both attracted substantial net inflows (Exhibits 1 & 3). We were hopeful then that the inflows would eventually spill over to equities but this did not materialise (Exhibits 2 & 4).

• As it stands now, the tailwind of accommodative monetary policy by key central banks in the world has been negated by the headwinds of the heightened US-China trade tensions and a mounting global recession risk, as illustrated in the flattened, and at times, inverted US bond yield curve.

Our Top Buys

• Amidst the heightened US-China trade tensions and a mounting global recession risk, we anchor our stock selection on: 1. Value stocks – Malayan Banking (discount to historical P/B ratio, dividend yield of 6–7% p.a.), RHB Bank (0.8–0.9x P/B ratio) and Serba Dinamik (steep discount P/E valuation to peer Dialog Group); 2. Defensive plays in a low interest rate environment – Tenaga Nasional (also potential rerating via a demerger exercise); 3. Beneficiaries of the US-China trade war/trade diversion – Top Glove (tariff advantage over Chinese exporters in the US market) and Westports and MMC Corp (trade diversion from the US-China trade war, as reflected in the increased throughput recently); and 4. Domestic consumption proxies – DRB-Hicom (also Proton’s turnaround), MBM Resources (also Perodua’s dominance in the local auto sector) and Berjaya Food (consumer lifestyle and experience) (Exhibit 5).

Source: AmInvest Research - 14 Oct 2019