• Budget 2020 sees GDP growth remains bullish. The economy is expected to grow at a slightly faster pace of 4.8% in 2020 from 4.7% in 2019 despite the external headwinds. Domestic demand is expected to spearhead growth, expanding by 4.0% in 2019 and 4.8% in 2020, notwithstanding heightening external headwinds following a prolonged trade war and geopolitical tensions.

• Several winners in the Budget. Major beneficiaries are infra-related sector as the government allocates higher funding towards the sector; the consumer sector due to continued emphasis on providing relief to incomes; plus technology and healthcare as tax reliefs and higher budget allocation are also extended to these sectors.

• Fiscal deficit channelled to infra. The proposed additional injection of 0.2% of GDP through development expenditure to revitalise public investment via capital formation in strengthening long-term potential of the domestic economy is positive in our view. This raises the deficit target has been revised to 3.2% of GDP, slightly higher than 3.0% originally announced in Budget 2019. The allocation will be mainly channelled to accelerate the implementation of impactful transportation and connectivity projects, such as the construction of Pan Borneo Highway, Mass Rapid Transit 2 and Gemas-Johor Bahru Electrified Double Track Project.

• Earnings remain a key risk to market. Corporate earnings are already in recession despite a better-than-expected GDP growth for Malaysia. With exports expected to grow at an only 1.0% in 2020 amidst external headwinds, risk for corporate earnings – particularly for KLCI companies – remains firmly on the downside. The 2020 Budget will assist in preparing Malaysia’s competitiveness for the longer term, but is impact-neutral on short-term corporate earnings.

• Foreign flows remained negative. Flows remained skewed towards local investors last week, as foreign outflows continued. Foreign funds registered a net outflow of RM277m, raising total outflow to more than RM1bn in the space of 2 weeks. As we enter 4Q19, cumulative foreign net outflow is now at a hefty RM8.4bn. The KLCI’s outlook remained subdued – closing at near 3-year lows – as risk premium rises amidst heightened global trade conflict.

Source: BIMB Securities Research - 14 Oct 2019