Highlights

• The PM revealed the recalibrated budget with 11 measures to ensure the sustainability of growth momentum and government financial position.
• Official macro forecasts for 2016 remain broadly unchanged, i.e. GDP growth of 4.0-4.5% (previously: 4-5%) and fiscal deficit of 3.1% of GDP (unchanged).

Comment

• The recalibrated budget (lower oil revenue of RM7-9bn offset by other revenue gains and spending cuts) is overall negative on GDP growth. Despite the potential spectrum tender revenue (RM4.5bn) and reduction in duty loss (RM1bn), there is still a net spending cut of RM2-4bn.
• The increase in household disposable income (EPF contribution rate cut & tax relief) is expected to raise private consumption growth by 0.5ppt to 6.0% (2015e: 6.0%).
• All-in-all, we cut our 2016 GDP growth forecast by 0.3ppt to 4.2% to reflect (i) lower government spending; (ii) lower Petronas expenditure; which will be partially offset by (iii) higher private consumption growth.
• We opine that the GDP downgrade still does not warrant an imminent OPR cut. However, SRR may be cut again in 1H16 should capital outflows persist amid aggressive deposit campaign by banks to comply Basel III requirement.
• On the market, recalibrated budget removes some macro risks but introduces uncertainty to the Telco sector. Cellcos are the unfortunate casualties and we expect sentiment to remain negative until clarity on spectrum tender emerges.
• Positives for the Consumer sector (mainly staples). Limited impact on big ticket items (property & auto) as the increase in disposable income is only a temporary booster.
• Positives for Brewery and Tobacco given the stricter enforcement on the duty free islands.
• Construction is still a clear winner given the commitment to prioritise road and public transport projects.
• Property measure has minimal impact on developers under our coverage; most products are priced > RM300k/unit.

Target

• We lower our end-2016 FBM KLCI target to 1,760 (previously 1,820) based on 15.0x (previously 15.5x) of oneyear forward earnings to reflect downward bias in GDP growth and uncertainty in telco policy.

Strategy

• We continue to advocate defensive stance in larger cap space in most of 1H16 to ride through volatility and to capitalize on deployment of Valuecap funds. Stay invested in quality export stocks that will still deliver growth in the absence of strong US$ catalyst.
• Position for potential MYR appreciation and foreigners’ return in 2H16. Usual foreign fund darlings with higher beta (i.e. Airasia, CIMB, Digi, IOI Corp) will be under the radar.
• Top picks: add Gamuda (TP: RM4.85) and Westports (TP: RM5.35) to reflect removal of uncertainty on infra projects and TPPA approval by the Parliament. Axiata & Digi are out.

Source: Hong Leong Investment Bank Research - 29 Jan 2016