Highlights

• 2017 Budget is essentially a lifestyle budget intended to address public grouses, especially among younger segment.

• Economic front, the budget again aims to safeguard economic growth within constraint of a tight budget condition.

• We concur with government’s projection that GDP growth will be supported above 4.0% in 2017, with tame inflation and narrower current account surplus.

• Fiscal numbers appear broadly realistic but main challenge is still for crude oil price to average well above assumption of US$45/bbl in 2017.

• The government’s commitment to better economic numbers in 2017 (GDP growth, fiscal deficit, etc.) shall provide comfort to investors on better market foundation anchored by sound economic fundamental.

Implication to the market

• We are mildly positive on 2017 Budget on (i) government’s commitment to better economic projections; and (ii) pockets of measures to benefit broad market, outweighing the negative from broadband initiative on TM.

• Measures that are positive for broad market: (i) lower effective tax rates for companies that are poised for earnings recovery in 2017-18; (ii) RM3bn special fund by GLC for small-mid cap stocks.

• Beneficiaries: Automotive (measures to encourage car ownership), aviation (tourism measures), construction (sustained DE & RM55bn East Coast Rail Line), consumer (higher BR1M), education (higher allocation) & property (civil servant higher loan eligibility, release of land to GLC & stamp duty exemption for properties

• TM is major loser as fixed line broadband providers are mandated to double the speed at half the price by 2019.

• Construction of more quality public hospitals to heighten competition for private healthcare players.

Strategy

• In the absence of earthshaking measure, we opine that market will refocus on external developments (i.e. US presidential election, crude oil & fed rate hike). On local front, release of GDP data (11 Nov) is crucial to determine whether growth has bottomed and another OPR cut is needed.

• We expect a pick-up in 3Q16 GDP growth to 4.2% with BNM staying pat, providing further comfort to the market that economic growth has already stabilized.

• Still expect FBM KLCI to move higher towards year-end on improved domestic data amid strong tendency of year-end rally. 2016 year-end FBM KLCI target unchanged at 1,730 (15.8x 2017 EPS).

• Top picks re-jigged: Big caps: Digi, Gamuda, MISC, Sunway and TNB. For small/mid-cap stocks, we like Matrix, MBMR, Mitrajaya, SunCon and TiongNam.

Source: Hong Leong Investment Bank Research - 24 Oct 2016