Executive Summary

It was another non-starter for FBMKLCI in 1H23, though we have been expecting this. The uncertainty over US policy outlook was a major market dampener, which hurt sentiment, whilst also trampled the Ringgit. This was a major pain following USD that rose steadily against major currencies, a bane for emerging economies (EMEs), with Ringgit and Yen emerged as the biggest casualties. Hampered by a series of negative developments that triggered systemic risk and higher risk aversion, namely the US banking crisis (March 2023) and US debt ceiling impasse (May 2023), was a perfect storm that stymied sentiment against EMEs, not only equity but also currency. It was an easy foresight, nonetheless, given investors penchant for safe haven asset during stress market condition, and in this situation, the USD and US Treasury emerged triumphant. China’s slower-than-expected economic recovery also soured sentiment, not to mention a series of key general elections in EMEs that stoked cautious trading sentiment. Among others, Turkey, Thailand, Indonesia, Argentina and Poland are all due to hold their general election in less than a year. This underpinned foreign investors cautious stance against EMEs. Foreign investors aversion against a country’s political condition is well documented and this is expected to be repeated.

Our view on the market as a whole remains unchanged as we expect the market to rebound in 2H. This will be driven foremost by US policy pivot amid its central bank that could cut the FFR, as early as 4Q23 or 1Q24, courtesy of an expected pullback in US inflation. For perspective, the FFR is over 100 basis points (bps) above its neutral rate and this will be the driver that will push the FFR lower. US inflation is also expected to moderate convincingly, courtesy of high base effect and lagged impact of cumulative increases in FFR. The expected moderation in US inflation in 2H and the punitive level of FFR could push the US central bank to make amend on FFR, to the cheer of equity market. On that score, US FFR could be cut by as much as 100 basis points, if not more.

We foresee cautious trading sentiment prior to August no thanks to six (6) states mid-term elections. This will be a litmus test to gauge the support for the Unity Government (UG). Coupled with US’s policy pivot, expected in 4Q23 or 1Q24, a narrative we have been propagating since January 2023, will be a combination of catalyst that will push the market higher. Foreign investors will also warm up to the reform initiatives by the UG. On that score, the government is expected to announce holistic reform initiatives during the tabling of Budget 2024, part of a grand plan to boost our fundamentals. Against this backdrop, we derive our year-end 2023 FBMKLCI target of 1,550 based on PER of 15.0x. Upside potential of FBMKLCI could be capped however by weak broader market sentiment against EMEs, on the back of China’s slower-thanexpected economic recovery, existential crises from US, including but not limited to US banking crisis (still), elevated political risks and prolong global supply-demand imbalance for key commodities.

• We project GDP growth to touch 4.5% YoY (2022: 8.2%) in 2023, an impressive prospect, given a moderation in global growth (IMF Global GDP 2023F: +2.8%; 2022A: +3.4%). This will be driven by the full turnaround in services and mining sectors and resilient growth by other key growth determinant, manufacturing. Private consumption will remain as a key growth driver thanks to the full year impact of economic openings (note: April 2022). Employment and wages are also expected to improve following various measures to improve the labour market condition (2023F new employment: >500k; 2022: >1mn) and boost income (i.e., wage recovery; targeted financial transfer, minimum wage enforcement). This will be added by a multi-pronged fiscal initiative to tackle the rise in the cost of living and hence, a resilient disposable income for Malaysians. Aggregate investment is also expected to rebound thanks to improving prospects post COVID-19 and by extension, growth outlook in 2023.

• We are of the view that the government will double down its efforts to restore Malaysia’s fiscal balance and this will begin with targeted subsidy initiative, a holistic effort that will gain in traction post July (note: after mid-term state elections). The government has got the ball rolling by managing the expectation following various hints and statements on fiscal subsidy, namely subsidy allocation is only for the deserving few such as the B40 and M40 groups. T20 group will have to bear the full market cost on various products and services, starting with petrol and electricity. As the mechanism is being worked out, refined and finalized to minimize the economic impact (and hence, limiting political damage), we think it is highly likely that the government will table this in Budget 2024 - for full implementation next year. This prospect is positive for economic resilience and sustainability, one of the many red flags about Malaysia. Our open economy and rapid contagion effect during global crisis underpins the government’s bold decision to correct the imbalance. Positively, we should expect a leaner and more agile economy moving forward.

• On that score, inflation is expected to remain elevated well into next year, no thanks to Subsidy Rationalisation Initiative (SRI), though we think the impact will be cushioned by automatic stabilizers and/or target financial transfer. Nonetheless, the impact will be oneoff and is not expected to be a major drag to the economy. In fact, the expected savings from the removal of subsidy from the T20 group (up to 40% of annual subsidy expenditure) will be channeled towards high impact initiatives namely education, infrastructure, productivity, to name but a few. The government is also expected to pave the way and lay the foundation to widen the fiscal revenue and, on this aspect, GST (though will be renamed and rebrand) is the way forward. The solid support for UG (controls a two-third of the Dewan Rakyat) and ample time before the 16th GE (note: November 2027) suggests a shift in ‘axis’.

• The impending six (6) states elections that need to be held by early August (at the latest) could push investors a ‘wait-and-see’ attitude. The outcome of this could also be a yardstick to gauge the UG prospect to continue for the 2nd term (note: 16th GE) and hence, continuity and sustainability of government’s policies. It is also an acid test to evaluate the people’s support towards the UG policies and a vote for their ability and capability to run the country. In a nutshell, the outcome of the state elections is wide reaching - which could trigger or deter the return of foreign investors. On that score, the UG is expected to punch above their weight to canvas for support.

• We like cyclical (MISC, MMHE, MRDIY, Padini, IHH Healthcare) and event-driven stocks (TIME, TM,) in addition to growth stocks (MyEG, Hibiscus, Velesto, Gamuda) amid economic recovery, rapid reform initiative, and strong global technology adoption that will boost top line and therefore, an expected rally in asset prices. Our top picks (big and midcaps: 10 stocks; small caps: 5 stocks) offer attractive valuation and growth story that will propel their rise in 2H23.

Source: BIMB Securities Research - 5 Jul 2023