Executive Summary

The fourth quarter is usually a good time for the FBMKLCI as the probability of a QoQ gain and the average return are at their highest level in this period. The ability to maintain this feat in 4Q23 is highly dependent on the measures to be unveiled in the Budget 2024 and the macro factors. Concerns that new taxes in this budget could sap demand, increase operating costs and drag corporate earnings are dampening risk appetite. A much-dreaded capital gain tax (CGT) on quoted shares will severely blow the equity market if the government widens its net when such tax on unquoted shares comes into effect next year, as previously announced in the revised Budget 2023. Externally, crude oil prices, inflation, monetary policy, the state of affairs of major economies and geopolitical tensions are the key factors that could shape investors’ perceptions and reactions in the financial markets as we stroll into the final quarter of the year. With so many uncertainties, there is a downside bias to our end-2023 FBMKLCI target of 1,515, which is based on a CY24 PER of 13.3x. Nonetheless, the target is still within reach if 1) the government chooses not to rock the boat and find ways to increase its revenue by tackling the shadow economy and tax evasion while cutting its operating expenditure to reduce the fiscal deficit, 2) possible drivers in the upcoming budget and 3) window dressing activities.

• Externally, the high crude oil price and speculations that it will break the USD100/bbl resistance soon will continue to fuel concerns about its impact on inflation and the likelihood of a continuation in the global monetary tightening cycle, especially in the US, at the expense of economic growth, as opposed to a possible pausing in hikes soon.

• China’s unsettled property market crisis and a slowing economy add to the woes against the backdrop of simmering geopolitical tensions on many fronts, especially between the US and China, and Russia and Ukraine, which have divided the world. Hopes are running high that China will relent to more aggressive spending soon to revive its economy, which is displaying signs of deflation.

• For Malaysia, while a global slowdown will spell trouble for its exports, there are high possibilities of the government cushioning it with measures that will stimulate domestic activities in Budget 2024, and the inflow of FDIs is sustaining hopes for better economic growth next year. Thus, the likely corresponding improvements in corporate earnings.

• Budget 2024 will be tabled in parliament on 13 October. It should embody the spirit of the Madani Economy framework, which emphasizes on restructuring the economy and providing Malaysians a better quality of life through equitable distribution of wealth. The expansionary budget is expected to zoom in on growth drivers, structural reforms, sustainable development and measures to increase the citizens’ well-being.

• We expect a budget allocation of RM387.3bn for 2024, consisting of RM292.3bn and RM95.0bn for operating and development expenditures, respectively. This will be funded by RM302.5bn in revenue collection, leading to a fiscal deficit of 4.2%, which will be funded by debt.

• We predict slightly better GDP growth of 5% in 2024 (TA: 4.2%, MoF: 4.5% in 2023), driven by the services and manufacturing sectors, and supported by a stable labour market, wage increases, and private investments. While domestic sectors would benefit from this budget, the ‘risk off’ mood should prevail until budget day as investors remain cautious about new taxes.

• We forecast a stronger earnings growth of 14.0% for the FBMKLCI in CY24 versus 5.2% in CY23, driven by the Banking, Oil & Gas and Power & Utilities sectors. Valuation-wise, the stronger earnings growth will contribute to CY24 PER and P/Bk of 12.9x and 1.2x versus comparable peers’ 12.6x and 1.5x, and the FBMKLCI’s 5-year average of 18x and 1.6x, respectively.

• Thus, the local bourse is grossly undervalued and should benefit from an eventual rerating, driven by the government’s progressive policies, structural reforms and prospects of continued improvement in the nation’s fiscal standing. No change in our strategy to “Buy-on-Weakness” into the following specific themes, 1) Undervalued Blue Chips (AMBANK & CIMB), 2) Defensive Plays (FFB, FOCUSP, KPJ, PADINI & SCOMNET), 3) Digitalisation (TM), 4) Domestic Infra & Property (GAMUDA, KERJAYA, PTRANS, SIMEPROP & SUNWAY), and 5) Power & Utilities (TENAGA & YTLPWR).

Source: TA Research - 3 Oct 2023