Profit Taking Pressure Rises due to New Taxes and Geopolitical Tension

The local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) managed to bounce back last week, mainly attributed to hopes that the US will put on hold any intention to raise interest rate in November meeting due to the high US treasury yield, and news that China is considering raising its budget deficit as the government prepares to unleash fresh stimulus to revive its fragile economy.

For the week, the FBM KLCI rose 27.26 points, or 1.92 percent, to 1,444.14, with Public Bank (+14sen), CIMB (+24sen), Maybank (+21sen) Petronas Chemicals (+46sen), Press Metal Aluminum (+25sen), IHH Healthcare (+12sen) and AMMB (+16sen) contributing to most of the gains. Average daily traded volume last week climbed to 3.17 billion shares against 3.05 billion shares the previous week, while average daily traded value was at RM1.96 billion, against the RM2.12 billion average the previous week.

The FBMKLCI could be subjected to some profit taking pressure this week post tabling of Budget 2024 as investors digest the impact of those measures on the economy and stock market while the looming dark clouds over the Middle East flare up concerns about potential for a broader conflict.

Budget 2024 saw a slight reduction of 0.8% to RM393.8bn in total allocation versus the RM397.1bn for this year. The expansionary budget themed “Economic Reforms, Empowering the People” projects a lower fiscal deficit of 4.3% (RM85.4bn) next year versus 5.0% (RM93.2bn) in 2023. It contained measures to boost government revenue, prioritise spending, promote high growth and high value ventures, attract domestic and foreign direct investments, incentivise smallholders and Micro, Small and Medium Enterprises, nurture sustainable development initiatives and green ventures, improve infrastructure, and enhance the well-being of the rakyat.

We are “Neutral” on this budget. The absence of capital gain tax on quoted shares is a significant relief but investors are likely to take note of the cautious tone in this budget, which was reflected in the lowered GDP forecast for this year and next, and the two percentage points increase in service tax from 6% to 8% that will include brokerages. The higher service tax should have negative implications on corporate earnings although it will be passed on to consumers, if volume suffers or some of them absorb it. The higher tax on brokerages is an additional cost for investors and traders that will deter trading activities on the local bourse, which has been trying hard to woo back investors and boost trading volume. In fact, most big cap sectors on Bursa Malaysia will be affected, including banks, power, gaming, etc. (For more details, please refer to our Budget 2024 Review: “Cautious and Pragmatic Approach” dated 13 October 2023)

The FBMKLCI has rebounded from the 5th October low of 1,412.17 in the run-up period to Budget 2024 despite Hamas's unexpected attack on Israel on 7th October. The market seemed to have taken the news in stride as the benchmark index had gained 32 points to close at 1,444.14 in the last six trading days, as the fall before that was steep, coming down from a high of 1,465.93 on 4th September. This reversal could lead to profit-taking pressure in the near term, led by concerns over new taxes and the Israel-Hamas conflict. If Israel’s vow to wipe out Hamas from the Gaza Strip translates into lethal military actions, likelihood of it facing strong counter-offensive measures from Hamas’ supporters in the Middle East, like Lebanon, Syria and Iran, are very high. In such circumstances, this conflict could evolve into a prolonged war that could not only destabilize this region, but also the rest of the world if the global military superpowers get dragged into it and forced to pick sides. We expect common sense to prevail with the global superpowers playing their role in defusing the tension. However, this war between Israel and Hamas is going to be a prolonged one, even if Hamas is destroyed, as the opponents may regroup and resurface from a different location.

Externalities aside, market sentiment should improve as confidence returns about the government’s ability to carry on with the structural reforms and pro-growth measures while keeping close tabs on spending to rein in the fiscal deficit. Maintain our end-2023 FBMKLCI target of 1,515, which is based on an undemanding CY24 PER of 13.3x versus its 5-year average of 18x. Sustained monetary tightening in the US and geopolitical tensions are key downside risks to this target.

Source: TA Research - 16 Oct 2023