Investment Highlights

• Accelerating to an aged society. We recently arranged a webinar named “Social Protection Policies for an Ageing Society” which was presented by Professor Emerita Datuk Norma Mansor, Director of Social Wellbeing Research Centre in Universiti Malaya and President of Malaysian Economic Association. The World Bank reported that countries in the East Asia and Pacific (EAP) region, including Malaysia, are ageing faster and at lower levels of income than richer and older Organisation for Economic Co-operation and Development (OECD) and Eastern Europe and Central Asia (ECA). An ageing society is defined as 7% of total population being 65 years and older vs. 14% for aged classification.
  The transition from ageing to aged societies will occur over only 20-25 years for most East and Southeast Asian countries in contrast to 50-100 years for OECD and ECA. Additionally, EAP countries have lower income levels than OECD counterparts, with GDP per capita based on purchasing power parity at peak working age accounting for 10%-40% of US levels at the equivalent point in its demographic transition. Eventually, an ageing population will strain fiscal revenues and expenditures.

• Rising old age dependency. In Malaysia, the shape of the population pyramid has changed to a smaller base as the years increase, indicating low birth rates while wider peaks shows a more elderly population (Exhibit 1) as life expectancy at birth increase from 57 years in 1960 to 76 years in 2020 (Exhibit 3). As such, more older people need to be supported by the working age population given low savings and lack of steady income during retirement. Old age dependency will rise from every 10 working age adults needed to support 1 older person in 2020 to 3 in 2050. Currently, only 0.5% of 7.7mil EPF active members had savings of RM600k in 2021, which translates to RM2.5k per month for the next 20 years of retirement. The Belanjawanku reference budget highlights that RM2,520/month will be needed for a single senior’s dignified standard of living, including food, housing, transportation, utitilies, healthcare, childcare, ad-hoc expenses, social participation and discretionary spending.

• Inadequate social protection coverage. Currently, social protection (SP) coverage in Malaysia is narrow and inadequate with only 9.1% (6.1% from social insurance and 3% from social assistance) of intended beneficiaries being covered in 2015, vs. an average of 55.1% for Asia and 12.8% for the world. Malaysia’s social protection coverage has a huge gap with low levels of female workforce participation and the rise of informal, non-standard employment and self-employed trends. This leads to a missing ‘middle’ coverage with 61% of the working age group not covered by any mandatory contribution scheme while 30% of intended beneficiaries do not receive any social assistance (Exhibit 5).

• Need for a growth-enhancing strategic development model. Norma views that Malaysia’s SP, currently based on a welfare model targeting poverty groups, should move towards a strategic development structure which will enhance growth as a population tends to be more enterprising and willing to take on risks with a reasonable safety net in place. Hence, Malaysia should adopt the life cycle approach to provide better coverage throughout different stages of life by targeting underlying vulnerabilities.

• Adopt dynamic life cycle approach. A life cycle approach involves a comprehensive and dynamic SP system which accounts for the needs of each and every phase of a person’s life to ensure a decent standard of living for every Malaysian, from the conception of a child to retirement. This involve providing access to health care for pregnant mothers and a conducive environment supportive of physical and mental health for every child and adolescent in schooling years. As the country progresses, SP should go beyond poverty relief and provision of basic needs, aiming to be preventive in nature and enable the building of resilience to overcome difficulties that may affect an individual’s wellbeing. This will involve protection by:
  1) Social insurance – old age and retirement, injury and death at workplace, unemployment and income reduction.
  2) Social assistance – government cash transfer, welfare transfer programme, universal healthcare coverage and school feeding programme
  3) Labour market programme – active and passive labour market policies
  This overall multi-pillar retirement income system should promote social solidarity, inclusivity and cross-subsidisation for working to not-working, young to old and “haves” to “have-nots” groups, leading to synergies and coordination across different arrangements for efficiency, impact and coverage (Exhibits 7-8).

• Strengthen social insurance and financial literacy. Norma recommends the strengthening of social insurance with mandatory EPF and SOCSO contributions or automatic enrolment for each citizen upon reaching 18 years of age while ringfencing part of EPF funds by tax or endowment.. She also advocates the introduction of basic old age pension (monthly income for all aged 70 years or older) and consolidation of all old-age social assistance programmes into a protection floor, funded through a solidarity fund (Exhibit 8). Norma further recommends labour market intervention to provide more employment opportunities for the elderly, raising the mandatory retirement age according to life expectancy and nurture financial literacy from a young age for sound retirement planning.
  As at end-2022, 6.7mil EPF members or 52% of the age group below 55 years had savings below RM10k in 2022 vs. a sum of RM240k for poverty-level pension. Coupled with the country’s fiscal constraints and the need to retain local talent, we expect the government to be more targeted in its subsidies and social assistance programmes, with plans to raise the mandatory retirement age from 60 years currently. In comparison, Singapore’s retirement age of 63 years presently will be raised to 65 years by 2030 and re-employment from 68 years to 70 years.

• Beneficiaries of an ageing population. An ageing society will need higher levels of healthcare services and specialised accommodation such as nursing or retirement homes. In the healthcare sector, we like DuoPharma Pharmaceuticals, IHH Healthcare and Apex Healthcare. While none of the property developers under our coverage specifically target the aged segment, Sime Darby Property has incorporated senior-friendly features such as ground floor access to community spaces for newer townships in City of Elmina, Bandar Bukit Raja and Serenia City. Meanwhile, Sunway promotes its developments with nearby access to its own hospitals in Sunway City and Sunway Velocity while Gamuda Cove offers outdoor activities.

• We maintain base-case end-2023 FBMKLCI target of 1,630, pegged to 1 standard deviation below its 5-year median of 16.5x, which is supported by Malaysia’s relatively stronger economic outlook and our economist’s improving MYR expectation to RM4.20-RM4.30 by December this year. Although Malaysia’s 2023F GDP growth is expected to taper to 4.5% (vs. consensus: 4.0%) from 8.5%-9.00% in 2022, this remains better than recessionary prospects in US and Europe amid expectations for a reset in US interest rate hike trajectory by end-2023 or early 2024.
  Best-case scenario from an abrupt US Federal Reserve policy reversal and better-than-expected global economic growth would underpin an end-2023 FBMKLCI target of 1,740, at 0.5 SDB5YM PE.
  The worst-case scenario from a full-blown global recession, new pandemics and worsening geopolitical conflicts translates to 1,380, pegged at 2 SDB5YM PE. We do not discount global equity volatility from more US rate hike surprises, bank failures, trade tensions and additional global sanctions on Russia.

• OVERWEIGHT on banks, oil & gas, autos, ports, property, REIT, healthcare and consumer sectors with top picks being RHB Bank, CIMB, Alliance Bank, Tenaga Nasional, Yinson, Telekom Malaysia, Dialog Group, Inari Amertron, Sunway REIT and DuoPharma BioTech (Exhibit 29). We also like small cap stocks with strong brand names which can safely navigate inflationary pressures such as Spritzer and niche agrichemical producer Ancom Nylex, as well as grossly undervalued companies such as Deleum (Exhibit 30). Our ESG champions are MayBank, Petronas Chemicals Group, Petronas Gas, IHH Healthcare, Telekom Malaysia, Westports Holdings, Inari Amertron, Sunway Holdings, Yinson Holdings, Sunway REIT and Astro (Exhibit 28).

Source: AmInvest Research - 7 Apr 2023