Highlights

As  in  the  recent  past,  we  expect  the  upcoming  Budget  to focus  more  on  socioeconomic  agenda,  which  has  negligible impact on the  equity market.

We  expect  2015  Budget  continues  to  be  a  mildly expansionary  budget,  balancing  between  growth  promotion and the need  to further  reduce fiscal deficit .

Government  to  introduce  a  GDP  range  forecast  of  5.5-6.0% for  2015  on  (i)  sustained  momentum  of  ETP  implementation; (ii)  resilient  private  consumption  with  further safety net for the lower  income  group;  (iii)  mildly  expansionary  public  sector expenditure;  amid (iv)  lower  net export contribution.

Government  to  stay  determined  in  slashing  fiscal  deficit  to 3.0%  of  GDP  with  higher  revenue  and  lower  operating expenditure.

Inflation  to  average  4.0%  due  to  GST   implementation,  multitiered fuel subsidy scheme and electricity hike .

Measures  to  reduce  cost  of  living  to  continue  taking  center stage (i.e. higher  BR1M with one-off  GST assistance).

Expect  multi-tiered  fuel  subsidy  scheme  to  be  unveiled  with implementation  in Jan-15.

Possibility  of  a  hike  in  minimum  wage,  alongside  with measures to enhance  workers’ productivity .

Impact 

The  expected  government’s  commitment  for  reforms  (budget deficit, GST, corporate and income tax cut as well as subsidy removal)  is  long  term  positive.  However, it has been factored in and likely to comfort rat her  than boost sentiment.

Potential hike in minimum wage is double edge  sword.

Coupled  with  Budget  “goodies”,  will  help  mitigate  impact  of GST and subsidy removal  as well as sustain demand.

On  the  other  hand,  sectors  (glove,  construction,  plantation, property  and  automotive)  with  high  labour  content  could  be hit.   However,  most  companies  have  mitigating  strategies, thus,  unless  the  hike  is  significant,  we  do  not  expect significant impact on margins and profitability.

Construction  sector  to benefit from implementation of projects but  believe  most  projects  would  not  be  new  and  have largely been priced into order book replenishment  assumption.

Property  sector  is  still  adjusting  to  the  punitive  measures (which  has  resulted  in  the  desired  effect)  announced  in  2 014 Budget.   Hence,  expect  it  to  be  spared.   More  government affordable  houses  expected  to  be  mitigated  by  potential extension  of  50%  stamp  duty  exemption  for  first  residential property.

Tobacco  sector  expected  to  be  the  biggest  loser  with potential  8-18%  excise  duty  hike.  TIV  still  suffer  from aggressive  price  hikes  in  2013  and  further  drop  in  volume could more than offset  buffer  from price hike.

Source: Hong Leong Investment Bank Research - 29 Sep 2014