• Market reaction likely muted following the measures announced in Budget 2025

• Continuation of structural reforms, including the commitment to rationalize RON95 subsidies and broaden tax base, reaffirm government’s dedication to improve fiscal position

• Maintain NEUTRAL on KLCI. We recommend rotating out of large caps into beaten- down small-mid caps. Added Nationgate and Pekat to our Top 10 Buys

Moving in the right direction

Against our expectations, Budget 2025 seems less aggressive in addressing the fiscal deficit, as the government has proposed delaying the RON95 subsidy rationalization to mid 25 instead of implementing it by the end of this year. However, we believe the government remains prudent in its resource allocation, focusing on key economic sectors that align with national master plan initiatives. While these allocations may not have an immediate impact, they are expected to strengthen the country’s economic foundation in the long term. For households, the government continues to provide essential support to the B40 and M40 groups, who are likely to receive further assistance after the RON95 subsidy rationalization is implemented. As with last year’s budget, the additional tax revenue and subsidy reductions will primarily impact the T20 group. Overall, the government is capitalizing on the momentum of accelerating economic growth, reflected in higher-than-expected tax revenue projections. While not a perfect solution, we believe the Budget is moving in the right direction. The fiscal deficit is projected to narrow to 3.8% in 2025E, down from 4.3% in 2024E, as revenue growth is expected to outpace expenditure growth. We forecast real GDP of 5.2% in 2024E and 5.0% for 2025E.

Wage hike to benefit consumer sector, but impact plantation and manufacturing; key infra projects to provide a boost to contractors

The increase in minimum wage to RM1,700 from RM1,500 is expected to result in higher disposal income, stimulating increased spending and benefiting the consumer sector. However, sectors that heavily rely on foreign labor, such as plantation and manufacturing (including EMS and Technology), are likely to face challenges in the near-term. No significant catalysts revealed for the construction sector, with allocated DE of RM86bn in 2025 (flat yoy). The government’s focus continues to be on selective priority projects, including the Penang LRT, Pan Borneo Sabah 1B, and Sabah-Sarawak Link Road Phase 2, with Gamuda identified as a beneficiary. Notably, there was no mentions of HSR, MRT 3 or the Johor LRT/ART projects.

Maintain Neutral on KLCI; Top BUYs

We reiterate our NEUTRAL call on the market with a year-end FBMKLCI target of 1,700. We expect a muted market reaction post-Budget 2025 with no significant measures introduced to boost equities, and investor sentiment is likely to stay cautious, with a “wait-and-see” approach ahead of the US Election on 5 Nov. Nevertheless, the prospects of a stronger local currency, political stability, and growth could attract foreign investors, lifting the local market higher in the long term. Our two-pronged strategy involves locking in gains from large-caps stocks while shifting focus to thematic small-mid caps, including data centres (Construction & Industrial), green economy push (Renewables), and growing FDI opportunities (Technology & EMS). We also see bottom-fishing opportunities in the O&G sector. Added Nationgate and Pekat to our Top 10 Buys list.

Source: Philip Capital Research - 21 Oct 2024