• 2018 Budget is essentially an inclusive budget intended to benefit the rakyat, irrespective of income brackets, and various sectors of the economy.

• Economic front, the budget again aims at supporting economic activity, aided by higher revenue in 2018.

• We concur with government’s projection that GDP growth will be supported above 5.0% in 2018, with moderation in inflation and stable current account surplus.

• Fiscal numbers appear broadly realistic, with potential revenue upside if crude oil price averages well above assumption of US$52/bbl in 2018.

• The government’s commitment to better economic numbers in 2018 (GDP growth, fiscal deficit, public debt) shall provide comfort to investors on better market foundation anchored by sound economic fundamental.

• We are mildly positive on 2018 Budget on (i) government’s commitment to maintain economic resilience by raising disposable income and promoting investments; and (ii) wide ranging measures to benefit broader economy.

• Key measures that are positive for the economy: (i) 2ppts personal income tax cut for taxable income RM20,000- 70,000; and (ii) RM750 special payments to government retirees and RM1,500 to all civil servants.

• Income measures have indirect implications and are harder to pinpoint the direct winners within consumer space. Nevertheless, the positive spillover of domestic sectors is expected to sustain economic momentum, and hence is incrementally positive for corporate earnings.

• Beneficiaries: Automotive (measures to encourage car ownership), aviation (tourism measures), construction (sustained DE & infra projects), consumer (income tax cut) and education (higher allocation).

• In the absence of earthshaking measure, we opine that market will refocus on external developments (i.e. US tax reform, crude oil & fed rate hike). On local front, economic developments are expected to remain resilient, with upside risk to 3Q17 GDP growth.

• However, the market may still suffer from lackluster corporate earnings and lack of forceful theme which will cap market’s upside. That said, downside is now protected by ample domestic liquidity as foreign selling abates.

• Still expect FBM KLCI to move slightly higher towards year end on decent domestic data amid strong tendency of year end rally. 2017 year-end FBM KLCI target remains unchanged at 1,760 (16x 2018 EPS).

• Top picks: Big caps: Airport, Genting, Maybank, Sunway and TNB. Small/mid-cap: DRB, GKent, LayHong, Pecca and Rohas.

Economic View

The 2018 Budget reflected a government that continued to provide mild support to the economy, aiming to benefit as many sector of population. Budget measures are expected to maintain growth momentum of the private sector, especially in the consumption and investment sectors. For B40 segment, special cash assistance, grant and income programmes have been continued to supplement consumption. For M40 and T20, tax deduction will increase disposable income to further support consumption. While total BR1M allocated remains the same as previous year, civil servants, pensioners and certain parties are expected to receive higher cash assistance in 2018. For example, public servants are expected to receive RM1,500 (RM1,000 in January 2018 and RM500 ahead of Hari Raya Aidilfitri), which will be higher than RM1,000 provided in 2017. Likewise, RM750 given to pensioners is higher than the RM500 given last year. In total, disposable income could increase by the tune of RM13bn in 2018 (2% of private consumption):

Source: Hong Leong Investment Bank Research - 30 Oct 2017