Prime Minister Anwar's second budget reflects a position of strength, benefiting from political stability, economic recovery, and renewed investor confidence. However, the rising cost of living and stagnant income growth prompted key measures, including a 13% increase in the minimum wage, initiatives to enhance first-time home ownership affordability and taxation of wealthier individuals through subsidy removals and a dividend tax. The prime budget beneficiaries are consumers (with a downward trade theme) and the property sector. In contrast, industries reliant on basic labour, such as plantations, gloves, and EMS, may face challenges. We maintain a value-seeking approach and anticipate a broader market recovery post-US elections. Local institutional investors are cash-heavy (approximately 10% of AUM) and we expect a forthcoming privatisation exercise to provide liquidity and further stimulate market re-rating by late Nov-24.

• Political stability alas. Malaysia's democracy has shown remarkable maturity over the past six years, with multiple smooth transitions of administration, contributing to a robust environment for foreign direct investment (FDI). This political stability has empowered policymakers to capitalize on the regionalization trend (China +1), providing structural support for Malaysia's tech sector. The last delineation of electoral boundaries occurred in 2018, and according to Article 113(2)(a) of the Constitution, a review is required at least once every eight years. This mandates a redrawing of boundaries by 2026. Notably, such an action necessitates a two-thirds majority in Parliament, which the current administration holds.
• Targeted fiscal reforms favoured over broad based approach. In Budget 2025, the government opted for a targeted approach to achieve its medium-term fiscal deficit targets of <3% (2025F: 3.8%). There will be a gradual reduction of subsidies for the top 15% income group, namely the rationalisation of RON 95 (mid-2025), healthcare and education subsidies. SST (sales and service tax) will be broadened to include non-essential items such as premium imported goods and commercial transactions between businesses that were previously exempted. A 2% dividend tax will be applied to dividend income received exceeding RM100k. This is unlikely to have too big an impact on dividend stocks, as it translates to only a -10bps impact on yield (assuming 5% dividend yield).
• Better inclusivity good for consumers, albeit near term negative for labour dependent sectors. Budget beneficiaries are the Consumer (with a downward trade theme) and Property sectors, due to the minimum wage hike and incentives for first time home buyers. Within our coverage, this should benefit Mr DIY, Spritzer, Sime Darby Property and Mah Sing. The minimum wage will be raised to RM1.7k/month (starting February 2025). Emphasis was also on affordability, with incentives for first time home buyers and the announcement that Perodua is working on a <RM100k EV. Ensuring no one is left behind, there are plans to make EPF contribution mandatory for foreign workers, which will be implemented in phases. In the near term, this would be negative for labour dependent sectors such as plantation, gloves and EMS. Assuming it is not passed on, companies most impacted would be V.S. Industry and Hap Seng Plantation. However, given the predictability of minimum wage increases and leeway provided for implementation, the actual impact might not be as severe.
• Thinking beyond Budget 2025. The current administration's term will conclude in Dec-27. We anticipate that PMX will introduce more drastic changes in tax policy next year during his mid-term, aiming to establish a more sustainable trajectory for government revenue growth. Malaysia's attractiveness for foreign direct investment (FDI) extends beyond political stability; it also includes affordable labour, water, and electricity. The minimum wage increase, in our view, is intended to encourage local entrepreneurs to rethink their business strategies. While the power tariff structure under the Incentive-Based Regulation is well-defined, the framework for water pricing remains insufficient, which is an essential consideration for data centers and other industries. Additionally, the need to implement a separate tariff for data centers to mitigate inflation poses a dilemma and presents downside risks for Tenaga Nasional Berhad (TNB).

Source: AmInvest Research - 21 Oct 2024