Executive Summary

It was tumultuous times for the global equity market amid setbacks, challenges and headwinds throughout the first half of 2022. The Ukraine and Russia conflict was a black swan event which may put to waste the hard-fought efforts to beat COVID-19. This existential risk has caused a rout in global financial markets amid volatility that similar to a full-blown crisis. The spark of the first war in 21st century following Russia invasion into Ukraine came at a time when the global central banks were all set to lift interest rates, their first post COVID-19. A folly and therefore, delay in normalising interest rates could backfire, a bitter pill to swallow nonetheless, despite the disruption caused by the war in Europe. COVID-19 remains a threat and this has hurt China’s growth momentum and by extension, investors sentiment in ASEAN. This stoked higher risk aversion, especially those with strong trade dependency with the nation, Malaysia included. The rise in USD against all major currencies is also a concern which could dim the global commodity outlook. Inflation risks are a worry given its global force and multiple push factors that caused its elevation. Above all, the global economy can finally normalise post COVID-19, one of dark periods since the last 100 years.

Malaysia’s growth momentum is expected to sparkle in 2022 thanks to a lagged impact from massive fiscal stimulus expenditure in 2021, favourable base effect advantage, record high Development Expenditure (DE) in 2021/22, full economic openings and proactive measures to keep COVID-19 disruption to a minimal. The rally in global commodity prices and therefore, a boom in trade, is a boon, in addition to strong recovery expected from aggregate investment and consumption activities thanks to pro-cyclical measures post pandemic. The cherry on the cake is the fast-approaching general elections, widely speculated to be held in November, if not earlier, Malaysia’s 15th and a highly anticipated one. The expectation of a strong government is ‘pull factor’ for foreign investors to return, particularly alluring amid Goods and Services Tax (GST) that may make a comeback and pump prime measures to boost the economy. It will be a double return for foreign investors given competitive Ringgit and attractive stock market given favourable upside against the current level. Against this backdrop, we derive our year-end 2022 FBMKLCI target of 1,610 based on CY23 PER of 15.5x.

• We expect 2022 GDP growth to touch 5.0%-5.50% with upside risks given booming trade and prolong rally in global commodity market. The government has hit all the right notes particularly with the favourable handling of COVID-19 post lockdown measures, the push for new minimum wage, the increase in financial transfer post crisis and the creation of massive employment – combination of drivers that will push economic activity to rebound.

• The government is also committed to keep fiscal deficit in check even after counting the sharp rise in subsidy for petrol, food and flood relief and therefore, the idea to bring back GST for fiscal sustainability. The reversion to a much more efficient GST could be done in half the time than before thanks to infrastructure-ready for the Royal Malaysian Custom Department and Inland Revenue Board (IRB). The contentious issue is only the ‘neutral rate’, the refund process and personal income tax reduction given the expected increase in fiscal revenue.

• Malaysians will go to the poll soon, estimated to be in less than a year. This will be an interesting election to watch given an increase in number of voters which consist of new and young voters (18-20 years old) who will be eligible to vote for the first time. Malaysia and Thailand are the only ASEAN members that are due to hold general elections in 2022/23 and therefore, rising investors’ interest in these two nations though Malaysia may thump Thailand due to an expectation of solid government post general elections (15th GE). A change of fortune vis-à-vis 14th GE will be a ‘pull factor’ for foreign institutional investors to return, particularly significant given their long hiatus since 2015. Their overdue return will push FBMKLCI to rally, lifting overall sentiment and for that matter, asset prices for index-linked counters - the darlings for foreign funds manager especially the big cap, well-run management, impeccable governance standard, high beta and huge liquidity counters. The ‘push factor’ will be the expected recession in advanced economies (especially US), their overbought currencies and inflationary risks which are set to reach generational high.

• We see multiple headwinds for Malaysia, however, chiefly the wide interest rate differential with advanced economies (AEs). Inflation risks are also a concern apart from supply chain disruption which could hurt our engine of growth, manufacturing sector. Resurgence in COVID-19 infections is also a worry given the potential emergence of Variance of Concern (VoC) given our waning antibodies against the virus though this will be negated by a respectable number of fully vaccinated adult population (>95%) and the government’s proactive measure to keep the infection rate and hence, the R-Naught low.

• Limited fiscal space and the sharp rise in fiscal subsidy could also backfire though the government may rationalise subsidy post 15th GE. The unsettling political situation could also unnerve investors though this could be defused post general elections.

• We like cyclical and event-driven stocks (KLK, IOI, Sarawak Plantation, MMHE, Valesto Energy) in addition to growth stocks (MPI, Inari, KPS, Datasonic, MyEG) amid full global economic openings, global semiconductor up-cycle, pent-up demand, supply and demand mismatch and strong technology adoption that will boost top line and therefore, the expected rally in asset prices.

Source: BIMB Securities Research - 30 Jun 2022