- Global investors ramped up purchases of Malaysian stocks and bonds this quarter amidst the global central banks are nearing the conclusion of their tightening cycles and better clarification in the domestic landscape.
- With the conclusion of the state elections, the administrations can now shift their focus back to economic concerns, potentially alleviating the political uncertainties that previously deterred investors.
- We see a positive economic growth in Malaysia ahead aided by the sturdy domestic consumption and investment growth ahead. Meanwhile, should the global demand recovery take into effect in 2024 or 2025, it could be an upside surprise for us to boost economic growth.
- We think the outlook for growth and inflation looks conducive to leaving policy unchanged for the rest of the year. However, the OPR is skewed towards an upside risk if the inflation goes wild after the potential reform of the subsidy mechanism.
- In light of our expectation that economic situation will rejuvenate from the current slump in the next two years, it could potentially expand FBMKLCI’s earnings over the course of the next 2 years to 2025.
- We envisage both NIMP and NETR will be game changers for domestic corporates and investors may position themselves in these sectors including Construction, Property and Green Energy to ride on the tide.
Market Review
The developed market bourses have bounced back from the earlier turmoil in 2022, followed by steadier investor sentiments and higher visibility in the Fed’s restrictive monetary policy amidst cooling inflation. On the other hand, the Asia markets are still struggling, dragged by China’s property woes and the choppy consumption recovery.
Turning the focus to Malaysia, the FBMKLCI index, which holds significant weight in traditional value counters, experienced a negative YTD performance by -2.9%. This comes as investors shifted their attention back to the growth-oriented counters after experiencing big losses last year. Meanwhile, the small and mid-cap counters delivered positive gains with 5.0% and 8.6% returns respectively. We attribute the divergence between large and small to mid-cap bourses primarily to positive sentiment on Malaysia’s domestic economic growth and potential revival of infrastructure projects, which have boosted the small to mid-cap counters. This can be proven by the robust YTD gain in Property, Construction and Utilities sectors.
Figure 1: The performance of FBMKLCI, FBM Mid Cap and FBM Small Cap
Table 1: Sectorial Performance in Malaysia
|
Sector |
YTD Performance |
|
Utilities |
26.3% |
|
Property |
25.7% |
|
Construction |
14.8% |
|
Transport |
7.1% |
|
Energy |
4.5% |
|
Technology |
0.2% |
|
REITs |
0.0% |
|
Telecommunication |
-0.4% |
|
Plantation |
-0.8% |
|
Finance |
-1.4% |
|
Healthcare |
-2.2% |
|
Consumer Product |
-4.5% |
|
Industrial Production |
-6.4% |
Source: Bloomberg Finance L.P., iFAST Compilation, Data as of 22 August 2023
Figure 2: Malaysia’s Six State Election Result (seats secured)
No surprise to the market with muted intraday performance
Despite the six-state election dusted with the result of polls return status quo, FBMKLCI remains lacklustre to close with an intraday -0.01% loss. On the other hand, in anticipation of the government’s commitment to ongoing infrastructure projects, property and construction sectors became the biggest post-election winners with 2.2% and 1.8% intraday gains respectively.
Meanwhile, the bond market has a muted reaction towards the election result with only 3bps change in 10-year MGS yield and 1bps change in the shorter-term 3-year MGS yield. Besides, the Ringgit depreciated against the USD by 0.6% due to the risk-off sentiment as market participants zoomed into China’s data that showed signs of weaknesses.
With the conclusion of the state elections, the administrations can now shift their focus back to economic concerns, potentially alleviating the political uncertainties that previously deterred investors. We believe the result of state elections will be an alert for the current unity government to strike a balance between maintaining economic growth alongside social welfare. We anticipate the government will continue with their current economic stance. However, we expect the subsidy rationalization will be postponed to year-end of 2023 and it will be implemented gradually in order to reduce public grievances.
Investors are refocusing on Malaysia
The appetite for the Malaysian capital market started to improve even weeks before the polls. Global investors ramped up purchases of Malaysian stocks and bonds this quarter. This trend coincides with global central banks nearing the conclusion of their tightening cycles and a clearer domestic landscape in Malaysia.
In fact, this week marks the 5th consecutive week of net foreign inflow into Malaysia's equity market, a trend that we have not seen for almost 1 year. At the same time, Malaysian institutions have been deploying their cash back to Malaysia’s equity after the net outflow in 2021 and 2022.
As shown in Figure 3, the net capital inflow from these 2 major participants (foreign and Malaysia’s domestic institutions) is one of the main drivers that impacts our domestic bourse’s movement. With the anticipation of subsided political uncertainties and investors’ sentiment to turn positive globally in 2024 onwards, we expect this will be a tailwind for Malaysia’s bourse to return to the past glory.Figure 3: Malaysia Foreign Equity Net Inflow (MYR mil) vs FBMKLCI (pts)
Economic growth in Malaysia remains resilience
Malaysia’s 2Q23 GDP growth moderated to 2.9% YoY, below the market consensus of 3.3% YoY, pulled by the high base effect from the reopening last year and shrinking exports.
We are expecting slower yet still-positive growth in 3Q23 and 4Q23 to hover around 3%-4% YoY on the back of resilient domestic consumption to offset the sluggish external trade activity recovery. The government's continuous endeavours in price intervention and sustaining subsidies for essential items have upheld domestic consumption. These measures have effectively softened the financial strain experienced by the Malaysian consumer.
At the same time, investment growth might be a wildcard under the Madani Economy, as it could pick up the momentum should the government accelerate the implementation of development projects that have been suspended earlier. In 1H23, the transition from direct negotiations in awarding tenders in several projects caused a delay in project approval, leading to a period of underperformance in this segment.
Nonetheless, the primary driver of growth performance continues to depend on external demand prospects. Up to this point, the economic performance of major export markets has been lacklustre as the possibility of a substantial boost from China's stimulus and its subsequent impact on global economies appears to be slim.
In a nutshell, we see a positive economic growth in Malaysia ahead aided by the sturdy domestic consumption and investment growth. Meanwhile, should the global demand recovery take into effect in 2024 or 2025, it could be an upside surprise for us to boost economic growth.
Figure 4: Malaysia GDP Component
Inflation has been moderating recently
It is encouraging to witness Malaysia’s inflation rate cooling in recent months, with July’s data slowed by 2.4% YoY, down from 2.8% YoY in June. In the meantime, the core inflation was also down from 3.5% YoY in the previous month to 3.1% YoY in July. In the next couple of months, we anticipate a likely easing of inflation in Malaysia, mainly due to high base effects on food and fuel expenses from last year. Yet, we do acknowledge the potential removal of subsidies could persist and might drive inflation higher.
Figure 5: Malaysia Inflation vs Core Inflation YoY (%)
Inflation is not out of the woods yet with the potential reform of new subsidy mechanism
Figure 6: Components of Malaysia’s Inflation YoY growth (%)
Figure 6 illustrates Malaysia’s inflation component YoY growth (%) since August 2022. We can clearly observe that despite an overall downtrend, the Food and Non-Alcoholic Beverages segment is still stubbornly above 4% (4.7% as of July 2023) due to the removal of subsidies in daily necessities such as poultry products and cooking oil earlier this year. On the other hand, the Transport segment showed near to 0% YoY growth in the recent months, partly due to the stabilization of crude oil price, coupled with the government’s ongoing provision of fuel subsidies for widely used RON95 and diesel.
We expect the potential new subsidy mechanism will focus on taxing the rich while keeping the inflationary pressure of lower to middle-income group under control. Currently, petrol, diesel and liquified petroleum gas (LPG) expenses, amounting to RM 37.3 billion, and cooking oil expenses, amounting to RM 4 billion, collectively constitute nearly half of the projected subsides of RM 77.3 billion.
As such, we think a targeted subsidies plan on certain items (such as fuel, food, electricity etc.) will be inevitable for the government to keep the economic growth going, in conjunction with the aim of narrowing fiscal deficit. We believe more details about targeted subsidies will be announced in the coming 12th Malaysia Plan Mid-Term Review and Budget 2024 in 3Q 2023. With that, the current inflation rate might increase if the government implements the new mechanism as both items (Food and Fuel) contribute the most to Malaysia’s overall inflation, directly and indirectly.
OPR to stagnant in the remainder of 2023
Bank Negara Malaysia paused its tightening cycle in July but left few clues on where they plan to take rates from there. According to the latest MPC minutes, the MPC noted both upside and downside risks to growth, without stating a risk bias.
We think the outlook for growth and inflation supports the notion of maintaining policy unchanged for the rest of the year. However, the OPR is skewed towards an upside risk if the inflation goes wild after the potential reform of the subsidy mechanism. Also, we anticipate that Bank Negara Malaysia will adopt a data-driven approach in the near term amidst the challenging and unpredictable macroenvironment.
Clear direction on fiscal policy: Will the Madani Economy initiative be a game changer?
Source: Malaysia Madani Official Framework, iFAST Compilation, Data as of 22 August 2023.
Table 2: Madani Economy Target
|
Targets |
Current |
|
|
Top 30 largest economy |
Top 30 |
38 |
|
Top 12 in global competitiveness |
Top 12 |
27 |
|
Top 25 on the Human Development Index |
Top 25 |
62 |
|
Increase labour share of income |
40% |
32.4% |
|
Improve Malaysia's position in the Corruption Perception Index |
Top 25 |
61 |
|
Towards fiscal sustainability |
<3% |
-5.6% |
|
Increase Female Labour Force Participation Rate |
60% |
52.7% |
Source: IMF, Madani Economy, Media, iFAST Compilation, Data as of 22 August 2023.
During the inauguration of the Madani Economy, Prime Minister Anwar Ibrahim highlighted the forthcoming realisation of numerous significant infrastructure undertakings. Notably, the speech affirmed the impending execution of projects such as MRT3, Penang LRT, Johor Bahru Bus Rapid Transit (BRT), as well as expansions at Penang and Subang airports. The Prime Minister also outlined a range of incentives, initiatives and allotments designed to benefit MSMEs, startups and specific sectors like technology encompassing electronics and data centres, resource-based industries including downstream oil & gas and rubber, along with tourism and affordable housing sector.
Figure 8: Summary of National Energy Transition Roadmap (NETR)
Source: NETR, Madani Economy, iFAST Compilation, Data as of 22 August 2023.
Under the Madani Economy framework, National Energy Transition Roadmap (NETR) drafted a landscape for the government’s effort to accelerate Malaysia’s energy transition on a large scale, from a traditional fossil-based economy to a high-value sustainable green economy. As of 2020, renewable energy only accounted for 4% of the total primary energy supply (sum of production and imports, minus exports) in Malaysia, distant from the target of 70% renewable energy as of 2050. According to the authority, opportunities worth up to RM 1 trillion are up for grabs beyond the transition to renewable energy such as smart grids, energy efficiency initiatives and energy storage solutions.
Figure 9: Total Primary Energy Supply (2020) in Malaysia
Followed by the Madani Economy, an additional noteworthy policy will be the unveiling of the National Industrial Master Plan (NIMP) 2030 by MITI. This strategic plan will centre its efforts on elevating the intricacy of the economy by augmenting the value contribution within pivotal sectors such as electronics and technology, encompassing areas like integrated circuit (IC) designs and data centres. Furthermore, the plan will target the chemical industry, focusing on speciality chemicals to enhance economic complexity.
Figure 10: Malaysia’s FDI
We envisage both NIMP and NETR will be game changers for Malaysian corporates and investors may position themselves in these sectors to ride on the tide. Apart from the sectors that are specifically mentioned in the NIMP roadmap, including E&E, aerospace, digital economy, chemicals and pharmaceutical, we believe the renewable energy and construction-related sectors are poised to benefit from the economic landscape as well.
As mentioned in NETR, the government has a strong intention to capitalise on a green economy with solar energy and electric vehicles (EV) being one of the priorities. Coupled with the NIMP plan to build a regional production base for next-gen vehicles, it might involve the development of Malaysia's EV ecosystem to facilitate the forthcoming widespread adoption of EVs. This could encompass expediting the setup of charging infrastructure and establishing a domestic supply chain for electric vehicles.
At the same time, we see construction and property as a bright spot under the Madani Economy landscape. With signs of progress in our political stability, we believe the government will continue with some of its previous policies, with a particular emphasis on advancing infrastructure development. Apart from the mentioned infrastructure projects, the relocation of multinational companies' manufacturing bases from China to mitigate risks has opened new opportunities in the construction industry, particularly in the establishment of semiconductor factories and data centres.
FBMKLCI earnings remain resilient coupled with cheap earnings
From the 5-year PE perspective, FBMKLCI is still traded below its -1 deviation area, indicating that the undemanding valuation appears to be cheap for investors to position themselves at a discounted price. On top of that, investors could enjoy a forward dividend yield of 4.8% in 2025, higher than the global bourses’ average forward dividend yield of 3.2%.
The expected influx from foreign tourist arrival and resilient domestic household spending growth could be a tailwind for consumer sector to ride on the tide. On the other hand, the financial sector could be aided by the rising loan growth from both infrastructure and property projects under the Madani Economy framework.
Although earnings growth in 2023 might deteriorate owing to the high base effect in the Plantation sector and sluggish growth in the Telecommunication sector, the steady earnings growth in the Financial and Consumer sectors could partially offset the negative earnings impact in 2023.
In light of our expectation that economic situation will rejuvenate from the current slump in the next two years, it could potentially expand FBMKLCI’s earnings over the course of the next 2 years to 2025.
Figure 11: FBMKLCI’s valuation
Table 3: FBMKLCI’s fundamental
|
2023F |
2024F |
2025F |
|
|
PE (x） |
14.1 |
12.9 |
12.1 |
|
EPS (sen) |
103.1 |
112.53 |
120.19 |
|
Earnings Growth |
-6.2% |
9.1% |
6.8% |
|
Dividend Yield (%) |
4.25 |
4.5 |
4.81 |
Source: Bloomberg Finance L.P., iFAST Compilation, Data as of 22 August 2023.
Key Takeaway
As the political narrative shifts, the potential bolstering of investors’ confidence could play a pivotal role in driving economic momentum and attracting further investment into Malaysia. Also, the stabilising monetary policy and clearer direction in fiscal stance are providing more certainties for investors. We think probably it is the time for investors to regain focus in this underappreciated market for years.
For investors who are interested in investing in the Malaysia bourse may consider abrdn Malaysian Equity SGD and iShares MSCI Malaysia ETF (NYSE:EWM).
The Research Team is part of iFAST Financial Pte Ltd.
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