Business & Markets 2013
Written by Bernard Ching of Alliance IB Research
Friday, 11 October 2013 14:14
KUALA LUMPUR (Oct 11): Budget 2014 will likely mark as the tipping point for implementation of much delayed structural reforms by the federal government in order to address rising public and household debt levels, as well as persistent budget deficits.
When revealed on 25 Oct, we expect a continuation of government’s recent initiatives to tighten its fiscal position which may encompasses
(1) reduction in subsidy bill,
(2) raising tax revenue,
(3) implementing goods and service tax (GST) to widen its tax revenue base,
(4) sequencing of mega infrastructure projects,
(5) focus spending on areas with high local content and/or multiplier effect, and
(6) measures to ease asset inflation and unproductive credit expansion.
These measures, together with rising interest rate as and when QE tapering starts, will dampen corporate earnings growth in the near term due to cost pressure which cannot be fully passed on to customers in the near term.
For that reason, we believe Budget 2014 is likely to have a muted effect on equity performance in general.
Key sectors which may be adversely affected by Budget 2014 include property (measures to curb speculation), CONSTRUCTION  (sequencing of mega projects), consumer (lower consumer spending power), banking (slower loan growth), and gaming (sin tax).
But Budget 2014 is not all bad news for Malaysian equities as the government will continue to balance the between the need for fiscal prudence and sustainable growth.
Visit Malaysian Year 2014 campaign will mean additional allocation required for tourism promotion which will benefit the aviation, hospitality and consumer sectors.
On infrastructure spending, although we expect overall allocation may decline from a cyclical high, certain key projects such as MRT, Langat 2 water treatment plants and urban highway projects will continue. This will ensure sustained orderbook visibility for major construction companies in the near term. Furthermore, government’s focus on development in East Malaysia will benefit contractors with a foothold there while Bumiputra contractors will also benefit from public projects which will be carved out for them.
While there is concern over Petronas’ commitment toward investment in downstream activities such as RAPID, our bullish outlook for upstream activities are expected to remain intact.
With GST implementation, telecommunication sector may be able to pass on previously absorbed service tax to pre-paid subscribers.
Over the near term, the debt ceiling impasse in US and impending QE tapering remain the key dampeners to equity market performance. Foreign equity flow into emerging markets will likely to remain tepid until there is better clarity on both fronts.
With Budget 2014 being another domestic dampener to the equity market, investors would need to be more selective in equity exposure going forward.
We retain our end-2013 FBMKLCI target of 1,730 and end-2014 target of 1,840.