Highlights

2015  Budget  provides  downside  protection  to  growth  while building  future  capacity.  Fiscal  reform  commitment  is  also reiterated  through  GST implementation.

Wider  GDP  range  forecast  of  5–6%  for  2015  with lower point estimate  of  5.2%  given  normalization  in  consumer  spending amid uneven  external recovery.

Mildly  expansionary  with  bigger  DE  allocation  while  keeping OE in check.

Fiscal  deficit  reduction  on  track  (3.0%  of  GDP)  while  bulk  of financing  still from domestic sources.

Measures  collectively  to  have  erosion  in  consumer  spending but momentum  of construction to be sustained.

Implication to the market

Government’s  commitment  to  reform  is  positive  longer  term but  already  factored  by  investors,  thus,  to  provide  assurance rather  than boost sentiment .

BR1M and +15% increase in DE to sustain economic growth.

Rise  in  DE  significantly  higher  vs.  yoy  growth  last four years coupled  with  commencement  of  several  major  projects  would be  positive  to  the  Construction  sector.   Our  Rating  on  the sector is under review  with upward  bias.

Unlike  in  previous  year,  no  sector(s)  adversely  affected  with no  further  punitive  measures  for  the  Property  sector  and absence of sin tax hike.

A  few  other  sectors  (Glove,  Oil  & Gas, Software, Technology and Transportation)  will also benefit albeit marginally.

On  balance,  neutral  to  slightly  positive  as  government  met expectations  of  pledge  to  reform  while  sustaining  growth  as well  as  positive  impact  on  Construction  and  several  others with no sector hit.

Strategy 

• Market  retraced  to  oversold  territory.   Rebound  is  imminent though  may  not  be  smooth  given  gyration  in  overseas markets.
• Fundamentally,  valuation  more  palatable  after  pullback  on standalone  and vs. regional  basis amid still ample liquidity.
• FBM  KLCI  P/E  premium  valuation  vs.  regional  and  ASEAN peers  either  at  mean  or  well  below,  sufficiently accounted for earnings  risk.
• Still  believe  market  has  limited  downside  fundamentally  and technically  and  recent  volatility  provides  opportune  time  for bargain  hunt.
• Maintain end-2014  FBM KLCI target of 1,910 (16x P/E).
• Top  picks retain as Astro, Dayang, IOI Prop, KNM, Maybank, Pharmaniaga,  QCT, RHB Cap, Scomies and TNB.

Source: Hong Leong Investment Bank Research - 13 Oct 2014