• Malaysia’s Fiscal Budget 2025, scheduled to be unveiled on 18 October 2024, is expected to be market-neutral, balancing fiscal prudence with a supportive approach toward growth and foreign direct investment (FDI), as well as enhancing the well-being of Malaysian citizens.

• While there is a potential for a budget rally, particularly in sectors aligned with pro-growth and infrastructure spending, certain industries may face challenges due to tax reforms or subsidy cuts, and investor sentiment will depend on the government's ability to balance economic growth with fiscal responsibility.

• Key sectors such as Property, Construction, Healthcare and Green Energy are poised to benefit, alongside anticipated support for the technology and tourism sectors.

• Our top picks for beneficiaries of Budget 2025 include Gamuda, AQRS, Lagenda, Mahsing, Matrix, Dnex, Inari, Malakoff, Cypark, MR DIY, Sime Darby and MBM. Additionally, we recommend Lagenda for their exposure to Iskandar 2.0 and affordable housing development, and MR DIY as a key beneficiary of the expected cash hand-outs and wage hikes.

Malaysia’s Fiscal Budget 2025, scheduled for tabling on 18 October 2024, aims to establish a strong foundation for future economic growth and support the equity market. While largely anticipated to be market-neutral, it is expected to promote fiscal prudence alongside a pro-growth and proFDI stance. As part of the broader Madani Budget framework, this budget will likely address macro and microeconomic challenges, focusing on easing the cost of living, promoting affordable housing, enhancing education and healthcare, and continuing direct cash support for vulnerable groups. Key sectors such as property, construction, and green energy are poised to benefit, alongside anticipated support for the technology and tourism sectors.

According to our economist, Budget 2025 will prioritize fiscal prudence while maintaining an expansionary, pro-growth approach. The fiscal deficit is projected to decline to 3.5% of GDP in 2025, in line with the government's goal of reducing the deficit to a range of 3.5% to 3.0%, as outlined in the Midterm Review of the 12th Malaysia Plan (MTR-12MP). This reduction will likely come from decreased development expenditure (DEVEX), projected at RM78.3bn in 2025, after exceeding RM90bn in the previous two years. The Public Finance and Fiscal Responsibility Act 2023 (PFFRA 2023), on the other hand, will guide fiscal management, with objectives including maintaining DEVEX at a minimum of 3.0% of GDP, reducing the fiscal deficit below 3.0% within 3-5 years, and keeping government debt below 60% of GDP. These measures are expected to boost investor confidence, contributing to positive momentum for both the Malaysian ringgit and the equity market 

A Challenge Ahead. Nonetheless, we foresee that reducing operational expenditure (OPEX) remains a difficult task, especially amid subsidy rationalization initiatives. The uncertain timeline for the RON95 petrol subsidy rationalization, a significant portion of total subsidies, creates challenges, as any changes could impact inflation and the cost of living. Moreover, the recent salary hike for civil servants adds upward pressure on OPEX, complicating efforts to curb government spending. While there are discussions around the potential return of a consumption tax to increase government revenue, this is not expected to be implemented in Budget 2025, as the Goods and Services Tax (GST) was repealed in 2018, and a new bill would need to be passed, likely delaying any new consumption tax until after 2025. According to Prime Minister Datuk Seri Anwar Ibrahim, as reported by NST yesterday, the government will only consider implementing GST if the minimum income threshold is raised to RM3,000-RM4,000, compared to the current minimum wage of RM1,500 in Malaysia.

Potential Impact on the Equity Market. Despite some interim challenges, such as rising global volatility prompting more conservative trading, a broader shift toward safer assets, uncertainties surrounding the U.S. presidential election outcomes, ongoing geopolitical conflicts in the Middle East and Eastern Europe, and evolving global economic conditions that are exerting pressure on market sentiment - Malaysian equities are expected to perform well toward the year-end. This positive outlook is supported by favorable developments related to Iskandar 2.0, government IT projects, data centers, and continued infrastructure development.

While there is potential for a budget rally, particularly in sectors aligned with pro-growth and infrastructure spending, certain industries may face challenges due to tax reforms or subsidy cuts. Investor sentiment will largely depend on whether the government can successfully balance economic growth with fiscal responsibility. Historically, budgets that include strong economic stimuli have led to positive market reactions, particularly in sectors that directly benefit from government spending or policy shifts.

Potential Winners. Lagenda, Mahsing, Matrix, Gamuda and AQRS are well-positioned to benefit from anticipated positive measures in the property and construction sectors, supported by affordable housing initiatives and ongoing infrastructure development. Gamuda, in particular, is poised to gain from mega and renewable energy projects, having already secured contracts for the Penang LRT segment 1 and the Upper Padas hydro project in Sabah, both awaiting rollout. Meanwhile, AQRS stands to benefit from public infrastructure redevelopment and refurbishment, as well as the potential resumption of the LRT3 station project.

In the Green Energy and Electric Vehicle (EV) sectors, locally made EVs are expected to receive cash rebates, while broader support for green investments aligns with Malaysia's sustainability goals under NIMP 2030 and the National Energy Transition Roadmap (NETR), benefiting green energy and technology-focused stocks. We believe MBM and Sime Darby will benefit the most due to their exposure to the affordable mass-market segment, as we anticipate that demand is skewed toward more affordable vehicles, as evidenced by the fact that Proton and Perodua account for 60% of total industry volume (TIV). Conversely, Tenaga Genco, Malakoff, and Cypark, which have been active in solar projects, are expected to benefit from green energy initiatives.

In the Consumer and Retail space, MR DIY, AEON, and Padini are likely to benefit from the anticipated cash handouts and wage hikes, as increased disposable income drives demand for consumer goods. This segment offers value-for-money products and smallticket items. Additionally, Budget 2025 is expected to provide further incentives for the technology and tourism sectors, creating growth opportunities for companies in these areas. The tech sector is likely to benefit from anticipated continued and expanded initiatives for automation and Industry 4.0, such as grants or tax deductions for capital expenditure on robotics and automation. Additionally, if the budget includes measures related to the National Semiconductor Strategy (NSS), Dnex is expected to be the biggest beneficiary.

Potential Losers. Sin Industries, which encompasses the tobacco and alcohol sectors as well as food and beverages related to sugar-sweetened drinks, may face higher taxes as part of revenue-generating measures, potentially negatively impacting the company's profitability in these sectors.

Our View. Budget 2025 sets a fundamental platform for Malaysia's long-term economic growth while being supportive of the equity market. While not all mega projects will launch in 2025, continued support for Property, Green Energy, and Construction, alongside incentives for MSMEs, Tourism and Technology, provides promising opportunities. Investors should position themselves in sectors poised to benefit, while being cautious of industries facing potential headwinds from fiscal reforms and subsidy reductions. Our top picks for beneficiaries of Budget 2025 include Gamuda, AQRS, Lagenda, Mahsing, Matrix, MR DIY, Dnex, Inari, Malakoff, Cypark, Sime Darby and MBM. Additionally, we recommend Lagenda for their exposure to Iskandar 2.0 and affordable housing development, and MR DIY as a key beneficiary of the expected cash hand-outs and wage hikes.

Overall, we expect positive momentum in local stock market to continue although in the near term, we expect the local bellwether may consolidate with an upside bias until fresh catalysts emerge, in line with global and regional performance. Additionally, uncertainties surrounding the US Presidential election outcomes, ongoing geopolitical tensions in both the Middle East and Eastern Europe, and evolving global economic conditions are likely to continue weighing on market sentiment before exploring opportunities in other lagging sectors as sector rotation. All in, we maintain our year-end 2024 target of 1,720 points, which is less than 10% away from the current level.

All in all, Budget 2025 may offer some clues on subsequent subsidy rationalization plans for various items, including the extension of targeted diesel subsidies to East Malaysia, RON95 petrol subsidy rationalization, and new sugar price mechanism, among others. Meanwhile, the economic growth momentum is poised to stay buoyant after the solid performance of 5.1% in 1H24, underpinned by strong domestic demand and export recovery. In view of upside inflation risk and a positive economic growth outlook, we expect BNM to maintain the OPR at 3.00% in 2024 and 2025.

The following table represents the performance of various Malaysian market indices a week before budget announcements from 2011 to 2024, highlighting notable trends and fluctuations in percentage changes a week before budget announcement over the years. Overall, the analysis reveals that the indices have a relatively high probability of positive movement in the week before budget announcements. The FBMKLCI, FBM100, and FBMEMAS indices exhibit the highest likelihood of positive performance, with a 71.43% probability of gains. In contrast, the FBMSC (small-cap index) has the lowest probability of a positive movement at 57.14%. Across all indices, the chance of positive movement ranges from 57.14% to 71.43%, indicating that markets generally respond favorably ahead of budget announcements. The likelihood of negative movements is lower, with probabilities ranging from 28.57% to 42.86%, suggesting that negative sentiment before budgets is less common, especially for larger-cap indices.

Source: BIMB Securities Research - 16 Oct 2024