Further Downside Potential Ahead of Budget 2024

The local blue-chip benchmark slumped to a one-month low last Friday, with banking, oil & gas and consumer heavyweights falling amid worries over potential taxes in the upcoming Budget and global interest rates stuck at higher levels clouding market sentiment. Persistent concerns that the hawkish stance from the US Federal Reserve and several other major global central bankers will mean interest rates could stay higher for longer amid the elevated inflation outlook were the main factor dampening investor appetite for stocks last week.

In the final week of September, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) lost 26.06 points, or 1.8 percent, to 1,424.17, with most of the losses coming from Public Bank (-14sen), CIMB (-16sen), Maybank (-9sen), Press Metals Holdings (-15sen), CelcomDigi (-13sen) and Petronas Chemicals (-16sen). Average daily traded volume last week declined to 3.12 billion shares, compared to 3.45 billion shares the previous week, while average daily traded value eased to RM2.09 billion, against the RM2.19 billion average the previous week.

As expected, concerns over capital gain tax (CGT) on listed shares in Malaysia’s Budget 2024, resurging inflation prolonging monetary tightening bias and a slowdown in the global economy underpinned the weak market sentiment last week. These concerns are not expected to diminish anytime soon and the FBMKLCI could languish until the tabling of the budget on 13th October, unless there is a clarification about the capital gain tax on quoted shares prior to that.

Investors are watching anxiously for the unity government’s second budget after taking power as it has revealed intention to impose new taxes, especially CGT that should have a negative impact on investor sentiment. There is no clarification on whether it is referring to CGT on unquoted shares that was announced last February and to be implemented in 2024 or more asset classes, including quoted shares, will be included.

Since 1998, the probability of FBMKLCI advancing in the one-month and two-week periods before the budget was as high as 57.7% and 65.4% versus 38.5% and 53.8% in the two-week and one-month period post-budget, respectively. Last year was exceptional as it contracted pre- and post-budget due to political instability and GE15. That could repeat this year, if the benchmark index languishes in the pre-budget period pending details about new taxes. Ability to rein in fiscal deficit at the backdrop of a stronger economic growth and the absence of CGT on quoted shares or new taxes that lower corporate earnings should have a positive spillover effect to contribute to the usual upbeat performance in 4Q and vice versa.

The fourth quarter has mostly been a stronger period for the FBMKLCI due to window dressing activities by the portfolio and fund managers. A usually weaker period in the third quarter due to seasonality factors between May and October as per the popular maxim, “Sell in May and go away,” could be another important reason for the QoQ gain in the fourth quarter. This year, the 3Q performance was much better as it rose 3.4% QoQ to 1,424.17 from 1,376.68 due to easing worries about a recession in the US, measures taken by China to address its economic weakness and the conclusion of six state elections locally. Nonetheless, it fell 15.94 points to 1,424.17 on the last trading day of September due to worries about the high crude oil prices stoking inflation and a looming US government shutdown. However, a US government shutdown was averted temporarily last Saturday after Democrats overwhelmingly backed an eleventh-hour Republican measure to keep federal funding going for 45 days, albeit with a freeze on Washington’s massive aid to Ukraine, and the bill has been signed by the president.

The data gathered from 1977 to 2023 revealed that the probability of the benchmark index advancing on a QoQ basis and the average total return in the fourth quarter are the highest among the four quarters in a year, which were 71.7% and 4.6%, respectively. The probability of a month-on-month gain increased to 84.8% in December, in line with the window dressing activities.

Despite limitations from possible new taxes in Budget 2024 and concerns about a resurging inflation, we can still hope that this trend will continue this year premised upon a stable government that will deliver a stronger economic growth next year and be able to woo back foreign direct investments and portfolio funds through progressive policies and sustainable development initiatives. Besides, the stronger corporate earnings next year should also be an important catalyst, provided minimal impact from any new taxes.

Source: TA Research - 2 Oct 2023