Despite being a pre-election budget, the tax and expenditure programme of the Federal Government in 2018 Budget aims to strive a balance between restoring fiscal sustainability and supporting private consumption and domestic demand. The Federal Government is targeting to incur a smaller budget deficit of 2.8% of GDP in 2018, compared with a deficit of 3.0% of GDP in 2017, the ninth consecutive year of reduction since 2010. As a result, from an equity stand, we do not expect Budget 2018 to fully excite the market although it does provide sufficient drivers to lift consumption spending, manufacturing capex and continued construction activity. Maintain Overweight and 2017E year-end target of 1,813 (based on 17.7x 2017E earnings).

Growth Prospects Remain Favourable, Largely Domestic Driven

Following the strong economic performance in 1H17, MOF raised the official annual GDP growth forecast for 2017 to 5.2-5.7%, against the government's earlier projection of 4.3-4.8%. MOF is also upbeat on economic prospects and expects real GDP growth to be sustained at 5- 5.5% in 2018, on account of favourable domestic demand. Government revenue is projected to increase by 6.4% to RM239.9bn in 2018 (RM225.3bn estimated for 2017). Higher revenue will emanate from both tax revenue and non-tax revenue. The Government has used a higher average global oil price assumption of US$52 per barrel for the revenue and expenditure proposals for next year, slightly higher than US$50 per barrel this year. We believe the projected lower budget deficit of -2.8% of GDP for 2018 can be achieved, but based on the assumption that strong revenue target is attainable, and continued restraint of operating expenditure.

Key Sector Beneficiaries - Construction and Consumer

Being a broad based budget with emphasis on improving disposable income, the consumer sector is positively impacted. The finance sector also has some marginal implications following stamp duty exemption for trading of ETFs and structured warrants. The introduction of an alternative exchange could however negatively impact Bursa (Hold; TP: RM10.30). Construction remains a key focus of the budget however the lower than expected development expenditure of RM46bn comes as a negative supriuse.

Maintain Overweight and End-2017 KLCI Target of 1,813

The KLCI has been drifting sideways albeit with a recent acceleration of portfolio equity outflows in the recent months amidst looming uncertainty ahead of the impending 14th General Election and tighter monetary policies in the US. Nevertheless, with firm GDP growth accompanied by a synchronized global recovery, an expected appreciation of the RM and valuations that are not too demanding, we remain Overweight on the KLCI. Our 2017 year-end target remains unchanged at 1,813 (but based on a lower 3-year mean PE of 17.7x and on revised 2017E market earnings). No changes to our large-cap picks Allianz Malaysia, AMMB, Gamuda, Globetronics, Genting Bhd, and Tenaga. For small/mid caps, we like Hai-O, HSS Engineers, Perak Transit and Uchi. The least-preferred names include AirAsiaX and Star.

Source: Affin Hwang Research - 30 Oct 2017