Malaysian Prime Minister Datuk Seri Najib Razak announced on Friday, 23 October, the 2016 Budget, marking the first budget under 11th Malaysia Plan (a five-year strategy) to transform the country into a high-income nation by 2020.
Malaysia, Southeast Asia’s second largest oil producer and the world’s second largest exporter of liquefied natural gas, has been navigating through a tricky economic environment where global crude prices have slumped since mid-2014. An economic slowdown in China, Malaysia’s biggest trading partner, and depreciating Ringgit have exacerbated problems.
Amidst the challenging headwinds, Najib tabled a pragmatic budget focusing mainly on Rakyat (People’s) wellbeing – without compromising fiscal prudence and economic growth. The government predicted economic growth of 4- 5% in 2016, a slight slowdown compared to 2015’s forecast of 4.5-5.5%.
Budget deficit is projected to drop to 3.1% of gross domestic product in 2016 from 3.2% this year and 3.4% in 2014. Oil revenue is expected to halve, but will be mitigated by increased GST and income tax collection. Although the lower budget may not excite foreign investors much, it would undoubtedly help support Malaysia’s investment grade rating for its sovereign debt.
The budget centers on five priorities:
- Strengthening economic resilience
- Increasing productivity, innovation and green technology
- Empowering human capital
- Advancing Bumiputera agenda and
- Easing the cost of living of the Rakyat
Local Equity Market: No Major Excitement
Despite its focus on growth, the budget doesn’t excite the local equity market much in the absence of significant incentives such as easing in property measures and tax rate cuts that could give a lift to corporate earnings.
Nevertheless, the budget’s reaffirmation of its focus on major infrastructure projects – ranging from Pan Borneo highway to railway transit projects (such as MRT2, LRT3 and BRT) – will continue to be a boon to the construction sector. The announcement of a special reinvestment allowance, which has extended tax incentive for capital expenditure from 2016-2018, is expected to benefit manufacturers.
Last but not least, the government continuing its cash hand-outs assistance to the lower income earners is set to improve consumer sentiment. The increase in minimum wage, welcomed by the Rakyat, though could affect the bottom-line of those companies who rely mainly on foreign labour, such as plantations firms.
While we remain cautious on Malaysia’s macro economic outlook, there may be some trading opportunities with state investor Valuecap’s RM20 billion allocations to support the market. The market could get a further boost should oil prices or ringgit stabilises. Foreigners have recently turned net buyers after selling down RM18.9 billion of local equities year to date, almost three times higher than RM6.5 billion for whole of 2014.
Sectors we like include construction, exporters (eg semiconductors, manufacturers), REITs & consumer staples. We will continue to use our bottom-up approach in stock selection, favouring companies that offer growth certainty and attractive dividend yield at decent valuations.