The 2015 Budget appears to be well balanced, combining commitments to achieve greater fiscal prudence but mindful of the impact of the higher costs of living on the rakyat. Important elements of the Budget include the implementation of the GST this April, and commitment to a petroleum subsidy mechanism. The property and sin sectors were unscathed, while infrastructure projects were strongly featured.

• Commitment to fiscal reform.The Budget reaffirms the objective of bringing down the fiscal deficit to3% of GDP in 2015. The goods and services tax (GST) will be implemented as scheduled this April, which will broaden the tax base. A petroleum subsidy mechanism will also be implemented in stages (no details yet) to ensure a more targeted subsidy and to reduce leakages and smuggling. The implementation of these key measures will preserve Malaysia’s sovereign rating although further improvement in the fiscal position will be required before an upgrade can be expected.

• A broadening of products groups not subject to GST. The scope of items not subject to GST was widened to include many daily consumables, medicines, books, newspapers as well as the first 300 units of electricity (from 200 units), diesel and RON95 petrol. Nonetheless, we have yet to see a comprehensive list of products that will be either GST-exempted or zero-rated. The proposed reduction in income tax by 1-3% from YA2015 and corporation income tax by 1% from YA2016 was as announced in last year’s Budget. Combined with the hike in BR1M handouts by MYR300 and the absence of additional duties on the brewery and tobacco segments, the consumer sector can breathe a sigh of relief. There were also no additional gaming duties while the property sector also escaped unscathed after the punitive curbs imposed last year.

• Construction and infrastructure projects still a key focus to accelerate public and private investment. The Budget proposal specifically mentioned seven large-scale infrastructure projects with a value in excess of MYR48bn. Notably, these include MRT Line 2 and LRT Line 3 to be implemented in 2015, in addition to the MYR27bn Pan-Borneo Highway. While these projects will have long gestation periods, it continues to reaffirm our expectation that the strong momentum of activity in the construction sector will continue to be sustained.

• The market pullback is a buying opportunity.There are no changes to our earnings forecasts arising from the Budget announcement. We believe the market pullback is an opportunity to accumulate growth stocks at more palatable valuations. We continue to project a recovery in corporate earnings with net EPS growth for FBMKLCI component stocks rising to 7.6% in 2015 from just 2.8% in 2014, in line with expectations of a better growth outlook in developed economies. We maintain our end-2014 and 2015 FBMKLCI targets at 1,940pts and 2,100pts respectively. Preferred sectors include construction, basic materials, technology and property. Some of our Top Picks include Gamuda (GAM MK, BUY, TP: MYR5.61), SapuraKencana (SAKP MK, BUY, TP: MYR5.33), Malaysia Airports (MAHB MK, BUY, TP: MYR8.51), Unisem (UNI MK, BUY, TP: MYR2.16) and Press Metal (PRESS MK, BUY, TP: MYR 8.30).

• As expected, the Federal Government announced that it will cut its budget deficit further to 3.0% of GDP or MYR35.7bn in 2015, from a deficit of 3.5% of GDP estimated for 2014. This will likely be achieved via an introduction of the GST to broaden its tax base as well as cutting its operating expenditure via further rationalisation of fuel subsidies. The consequence will likely be a jump in inflation and a slowdown in the economy during the year. As a whole, we expect GDP to slow down to 5.3% in 2015, from +5.8% estimated for 2014.

• Rising inflation and higher costs of doing business will likely dampen consumer and business sentiment, leading to lower spending. This will likely be made worse by the curbs on the property market in late 2013 and an interest rate hike in July 2014, and we believe the effects will likely be felt more significant in 2015. To what extent businesses and consumers will react to the double-whammy effect of higher fuel prices and the GST introduction remains to be seen. Any over reaction by consumers and businesses could pose downside risk to our GDP growth forecast.

• Net development expenditure of the Federal Government is projected to increase by 15.0% in 2015, a sharp increase from +1.4% estimated for 2014. This will likely help to support growth for the Malaysian economy under a relatively challenging external economic environment. The operating expenditure will be contained during the year, mainly by rationalising fuel subsidies, to improve the fiscal position of the Federal Government.

Source: RHB