Newsflash | Views on Budget 2022
ADDED:
01 November 2021
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With a focus on recovery, the recently tabled Budget 2022 is touted as the largest one to-date with an allocation of RM332.1 billion. 

The expansionary budget will see it being financed by new tax measures such as the Cukai Makmur (one-off prosperity tax) to plug any revenue gaps and narrow the fiscal deficit.

Gan Eng Peng, Senior Director of Equities
shares his views on its potential market impact as well as other measures of Budget 2022 in our latest Fundamental Flash.
Questions

1. How would a one-off prosperity tax impact the local market?
 

The newly announced Cukai Makmur will raise the corporate tax for companies earning above RM100million in pre-tax profit from 24% to 33%.  This only applies to Malaysia sourced income and is applicable for the year of assessment 2022.  The government has projected that the prosperity tax would raise up to RM4.9 billion. 

In our view, we believe the wealth destruction via the capital markets could be greater than the potential income raised. This 37% spike in tax rate effectively wipes out most of the already modest 5%-10% earnings growth of 2022.

Markets are priced-off future growth, the lack of which leads to potential derating as well as immediate kneejerk selldown to account for this impact. We think the broader market might correct 1%-3% in the near-term, potentially wiping off RM20-50 billion in value.

This prosperity tax also potentially mutes the growth outlook for 2022, leading to a flat market if there is no derating. We think investors won’t look into 2023 prospects yet. It also introduces future policy risk for corporate Malaysia, i.e. that it is okay to socialise profits in times of need. Corporates might also be incentivised to report lower profits in 2022 to minimise the tax burden.

2. Any other measures contained in Budget 2022 that could impact markets?
 
Other significant announcements in Budget 2022 include the removal of the stamp duty cap on share transaction of RM200 and an increase of stamp duty from 10 bps to 15 bps. This makes large share transactions less efficient and could result in reduced velocity of trading.

The lack of any further property pump priming measures will also disappoint the recent strong rally in shares of property developers.

3. Which sectors are the most and least affected?

The hardest hit sectors will be the banks, telcos, utilities, large oil & gas players, gloves and plantation companies. A point to note is that the prosperity tax does not apply for offshore income as well as those companies that have special tax incentives like pioneer status.

The tax is also imposed at the individual subsidiary level, so entities with multiple subsidiary profit centres will have a lesser tax impact.

The least affected sectors are small-caps and the technology sector. However, the secondary effect of a large-cap selldown might affect all constituents.

4. How are we positioning our Malaysian equity portfolios?

Our local portfolios were heavily weighted coming into Budget 2022 with notable exposure in the financial and telco space. Depending on the magnitude of the correction, we plan to gradually raise the cash levels across our domestic funds to a range of 5%-10% post announcement. 

Disclaimer
This article has been prepared by Affin Hwang Asset Management Berhad (hereinafter referred to as “Affin Hwang AM”) specific for its use, a specific target audience, and for discussion purposes only. All information contained within this presentation belongs to Affin Hwang AM and may not be copied, distributed or otherwise disseminated in whole or in part without written consent of Affin Hwang AM.

The information contained in this presentation may include, but is not limited to opinions, analysis, forecasts, projections and expectations (collectively referred to as “Opinions”). Such information has been obtained from various sources including those in the public domain, are merely expressions of belief. Although this presentation has been prepared on the basis of information and/or Opinions that are believed to be correct at the time the presentation was prepared, Affin Hwang AM makes no expressed or implied warranty as to the accuracy and completeness of any such information and/or Opinions.

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TENG CHEE WAI

Managing Director
Teng Chee Wai is the founder of Affin Hwang Asset Management Berhad (Affin Hwang AM). Over the past decade, he has built the Company to be the fastest growing and only independent investment management house in Malaysia’s top three, with an excess of RM47 billion in assets under management as at 31 December 2018.​

​In his capacity as Managing Director / Executive Director, Teng manages the overall business and strategic direction as well as the management of the investment team. His hands-on approach sees him actively involved in investments, product development and marketing. Teng’s critical leadership and regular participation in reviewing and assessing strategies and performance has been pivotal in allowing the Company to successfully navigate the economically turbulent decade.

Teng’s investment management experience spans more than 20 years, and his key area of expertise is in managing absolute return mandates for insurance assets and investment-linked funds in both Singapore and Malaysia. Prior to his current appointments, he was the Assistant General Manager (Investment) of Overseas Assurance Corporation (OAC) and was responsible for the investment function of the Group Overseas Assurance Corporation Ltd.​

​Teng began his career in the financial industry as an Investment Manager with NTUC Income, Singapore. He is a Bachelor of Science graduate from the National University of Singapore and has a Post-Graduate Diploma in Actuarial Studies from City University in London.
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