With diminishing base effect and weaker external scene, we project Malaysia’s GDP to moderate to +4.0% in 2023. Existing market headwinds are subsiding as FFR-OPR spreads should soon peak, ringgit is recovering, supply chains are improving, labour woes are easing and the political impasse resolved. Granted, a recession in the developed West and its contagion is the key risk, but there could be cushioning from China’s likely reopening. In any case, Malaysia is now on a much stronger footing (from sustained reopening) than it was during the pandemic. Our 2023 KLCI target is at 1,580 (15.1x CY23 PE).

Containing inflation has a price. While headline inflation has been slower with commodity prices moderating, core inflation remains high. Consequently, we expect further monetary tightening by central banks in the developed West – albeit at a slower pace but longer path. As policymakers prioritise keeping a lid on inflation, this will weigh on economic activity leading to high recessionary risk to these economies in 2023. IMF has lowered its 2023 global growth forecast to +2.7% from +2.9% (2022f: +3.2%).

Moderating growth for Malaysia. With diminishing base effect and weaker external environment, we forecast Malaysia’s GDP to moderate to +4.0% in 2023 (2022f: +8.2%) – sitting at the lower end of the government’s 4-5% official target. We expect inflation to average slightly lower at +3.1% next year (2022f: +3.4%), noting though that this is still above pre-pandemic levels with risk tilted to the upside. On OPR, our expectation is for another two +25bps hikes in Jan and Mar, bringing the benchmark rate to 3.25%. For the exchange rate, we see an appreciation bias to the ringgit averaging 4.34 (vs USD) in 2023 (YTD: 4.40).

Existing headwinds subsiding but... As existing headwinds are subsiding, we reckon that 2023 could be a less turbulent one for the market – but certainly not a smooth journey. With the KLCI having a -58% inverse correlation to the FFR-OPR spread, a deceleration in Fed hikes – likely peaking in 1H23 – should arrest weakness on the local bourse. The Fed taking its foot off the accelerator will also aid in ringgit’s reprieve, lending a secondary positive effect to the market. Supply chain indicators continue to show that disruptions are abating which would help tame inflation. Domestically, although worker scarcity is still prevalent (profound in manufacturing, construction and plantation), current approvals should fill at least 42% of the purported 1.3m labour void. Despite its unlikely political alliance, PM Anwar’s unity government appears to have started off on a relatively decent footing – a confidence vote slated for next week should solidify this, especially if it hits the 2/3rd mark. However, given rising recession probability indicators, the glaring risk for the market next year is the US (and EU) crashing into one and its resulting contagion to Malaysia. Two out of the past three US recessions saw Malaysia contracting as well (i.e. GFC and Covid-19), while barely escaping 2001’s dotcom bubble burst. Nevertheless, it would be useful to reflect that Malaysia is now on a much stronger footing (from its sustained reopening) than it was during the 2020-2021 pandemic. In addition, China’s increasingly likely reopening could provide some cushioning.

KLCI target at 1,580. We project CY22/23 KLCI earnings growth at -6.1%/+6.8%. Our 2023 KLCI target of 1,580 is premised on 15.1x PE (-1SD 5Y) tagged to CY23 EPS. While market choppiness isn’t likely to dissipate anytime soon in the wake recessionary fears, we feel that Malaysia’s bottomed out foreign shareholding and under-owned position would help contain an exodus. For the near term, we remain upbeat on a highly probable positive Dec (92% hit rate post-GFC). Our top picks are Tenaga, RHB, GenM, MAHB, Sunway, Carlsberg, VS, Armada, OSK, Dayang, ITMax and FocusP.

Source: Hong Leong Investment Bank Research - 16 Dec 2022