KL Trader Investment Research Articles

Malaysia Strategy: The P-word – Pass the Hat

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Publish date: Thu, 13 Jan 2022, 10:34 AM
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Macquarie Equities Research (MQ Research) views that the government’s recent RM1.4bn flood-relief package may be insufficient to support impacted household and expects that an additional fiscal spending will be needed as the floods will cause further inflation. While the recently added stamp duty cap of RM1,000 (previously none) is a positive news to the stock market, MQ Research thinks that the government may impose additional corporate taxes to boost tax revenue, while sharing its views that the general election could be delayed to 2023. Read on for an excerpt of MQ Research’s report dated 3 January.

More spending needed for flood and inflation relief

  • MQ Research expects supplementary fiscal spending will be needed for disaster relief and to rebuild damaged infrastructure from the recent floods; so far, an RM1.4bn flood-relief package has been announced for affected households/individuals. Considering the pandemic has lowered income and depleted savings, households have much lower resilience to the financial impact of the floods.
  • For context, media have estimated ~70,000 people have been displaced by the floods, with 210 locations over six states affected (vs a reported 200,000 people displaced by 2014/2015 floods). General Insurance Association of Malaysia (PIAM), a national insurance trade association, estimates RM2–3bn in flood-related claims. MQ Research estimates total damage could range from RM10bn-RM15bn (worst case) based on assumptions from AIG Malaysia that 80% of small to medium enterprises (SME) are not insured for floods and Zurich Malaysia that ~59% of motorists have no flood insurance and 74% of homeowners have no flood coverage.
  • The floods will also likely exacerbate inflation – an increasingly pressing issue. Damage to agriculture/livestock and infrastructure is worsening already high food inflation. The government is currently intervening with food prices by offering daily necessities at a 20% discount to market prices.
  • In addition, post-flood rebuilding will increase the demand for raw materials and labour, likely increasing construction-related inflation. Previously, Malaysians were relatively shielded from raw material inflation, as the property oversupply muted transmission to real estate prices.

Avenues to Increase Taxes Are Limited

  • The Ministry of Finance’s decision to reintroduce a stamp duty cap of RM1k on contract notes will lower trading friction, thus incrementally positive for Bursa Malaysia (BURSA MK, RM6.61, Neutral, TP: RM6.35). However, MQ Research does not believe this policy reversal is a meaningful change in tack when it comes to what MQ Research sees as the government’s recent heavy-handed approach towards companies to boost tax revenue. If anything, MQ Research believes the pressure for the government to increase tax revenue has only risen due to the floods, with the need to fund relief and combat inflation. In MQ Research’s view, large corporates risk additional taxes or potentially being co-opted into direct flood relief measures – which would be a risk for banks, telcos, utilities, and consumer staples.

Swing in political sentiment increases uncertainty

  • The government’s response to the floods has been poor, in MQ Research’s view, eliciting significant political backlash, seemingly unwinding most of the post-reopening goodwill the government has enjoyed. While MQ Research believes the incumbent coalition should still be seen as favoured to win the next general election, recent events have increased uncertainty of the outcome.
  • Crucially, MQ Research worries elections could be delayed to 2023 (vs MQ Research’s base case of 3Q22 elections), which MQ Research believes would be a major risk to its end-2022 1,760 KLCI target.

Source: Macquarie Research - 13 Jan 2022

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