Although many were expecting a severe fall in the Malaysia equity market right after the market reopened following the post-election holidays on 14th May 2018, the sell-off took about 1 week to materialise. FBMKLCI Index retraced from the post-election high of around 1875 pts to the lowest of 1714 pts, losing more than 8.5% within 2-week period. As of 12th June 2018, the local equity market recorded post-election losses of approximately -4.5%. In this article, we will be discussing the post-election development in Malaysia as well as the potential threats and opportunities ahead in the local market.
Moderation In 1Q GDP
On the macroeconomic front, Malaysia economic activity expanded at 5.4% y-o-y in the first quarter of 2018, falling short of consensus estimate for a 5.5% growth and the previous quarter’ 5.9% expansion.
|Figure 1: Malaysia's GDP Growth
However, despite a slower economic growth, the local economy witnessed a broad-based expansion from all the five sectors, Services (+6.5%), Manufacturing (+5.3%), Agriculture (+2.8%), Construction (+4.9%) and Mining & Quarrying (+0.1%). From the expenditure approach, the backbone of Malaysia economy – private consumption maintained its strong momentum, growing by 6.9% over the last quarter, in line with the improving consumer sentiment in the first quarter of 2018. The local net exports also contributed positively to the 1Q GDP growth due to a contraction in imports of goods and services.
On the flipside, the decelerating growth in government expenditure (1Q 2018: 0.1% vs 6.9% in 4Q 2017) as well as the contracting public investment (-1.0% y-o-y) were the main factors that caused a slowdown in the overall economic activity.
Moving forward, a moderation in Malaysia economic activity growth is unavoidable due to the high base effect, lower government spending as well as the slowdown in private investment due to the uncertainties in government policy. However, we believe that the high base effect and the slowdown in private investment would be temporary issues and it is likely to be partially offset by the robust private consumption.
KLCI Sector Saw Earnings Downward Revision
Over the past one-month, Malaysia equity market as a whole saw earnings downward revision of about -1.6%. Having said that, the earnings of the local listed companies are expected to grow at 3.8% and 6.7% for 2018 and 2019 respectively.
Following the government decisions to scrap several infrastructure projects such as the HSR line and MRT 3, the Industrials and Construction companies that have previously committed heavily into fixed asset investment with the expectation of increasing projects flow might witness downward pressure in their upcoming financial results over the next few quarters.
One of the Pakatan Harapan government’s manifesto – to raise the minimum wage to RM1,500, is expected to have an adverse financial impact for the plantation industry, should it be materialised. Reason being, the plantation sector is a labour-intensive industry, hence any disruption to the labour force would cause a significant impact on the industry as a whole.
For the local Telco sector, on top of the existing intense industry competition, Malaysia’s Telco players are expected to face another headwind – reducing profit margin, as the new government is planning to double internet speeds at half the price. Hence, the Telco sector also saw their earnings downgrade by about -4.8% post GE-14.
On the contrary, there was only one sector saw earnings upgrade over the month which is the consumer discretionary (+3.6%) sector. Consumer Discretionary counters are likely to benefit from the several promises and policies of the new government such as the abolishment of GST and toll collections as well as the reintroduction of petrol subsidy which are expected to boost the disposable income of Malaysian household.
Improving Ground Sentiment
Despite the increasing uncertainties in local policy front, the Vistage-MIER CEO confidence index, a quarterly survey that is commonly used as a leading indicator of what leaders of small and mid-sized companies are thinking about and planning for the future, showed that the CEOs of these SMEs are optimistic about the Malaysia economy outlook going forward.
According to the survey, of the 614 CEOs who responded to the survey, about quarter of them responded negatively on the current economic conditions, indicating the lack of satisfaction with the domestic economy lately. However, the expected economic condition index surged to 8-year high of 142 in 2Q2018 as most of the CEOs are predicting an improvement in the local economy soon.
|Figure 2: Vistage-MIER CEO Confidence Index & Expected Economic Condition
Besides the business leaders, Malaysian consumers are also gaining confidence in the country’s economic outlook following the zero rating of the Goods and Services Tax (GST), according to a survey conducted by Nielsen Malaysia. The improving consumer optimism could be a catalyst to the local manufacturers and retailers as this optimism is likely to translate into higher consumer spending. Based on the survey result, about 69% of the respondents expect their purchase habits to change following the reduction of GST, with almost one-third saying that they would spend more money on essential items.
Moving forward, any further moderation in Malaysia’s economic activity as well as the subdued earnings growth would be the potential threats to the local equity market. On top of that, the possible sovereign downgrade by the international rating agency would be another key risk for investors to watch out. Hence, increasing short-term volatility is unescapable.
As the old saying goes, “Adversity often leads to Prosperity”, hence, we believe that Malaysia’s equity market could outperform its regional peers over the next couple of years, should the new government able to progressively carry out their promises. We are likely to see a greater transparency and accountability under the administration of the new government and this would further boost the foreign direct investment in Malaysia which would eventually lend support to the local economic growth.
As it is extremely difficult to perfectly time the best entry point, for investors who want to tap into the mid to long-term investment opportunities in the local equity market, we would like to advise them to gradually buying into the local equity funds such as
Kenanga Growth Fund,
KAF Tactical Fund,
Eastspring Investment Small-Cap Fund or
Eastspring Investment Islamic Small-Cap Fund.