Budget 2023 was broadly within expectations and was centred on various social support initiatives to assist the economically challenged. There were few controversial proposals ahead of the six looming state elections, with markets breathing a collective sigh of relief following the absence of major new taxes on the private sector.
RHB Research, in a note, said rating agencies are also assuaged by the reduction in the fiscal deficit to 5% of GDP. The consumer sector is a net beneficiary, while the receding regulatory risk is a positive for the overall equity market.
Consumer – As usual, the regular spending boosters – eg cash handouts and bonuses for civil servants – were dished out while the tweak in personal income tax rates, which results in higher disposable income for the M40 group, will bode well for consumer spending. The absence of plans to reintroduce GST, the moratorium on excise duties, and lack of detailed measures to rationalise subsidies are positive for the sector. However, the failure to introduce a regulatory framework for the vaping market is a disappointment for the decaying legal tobacco industry.
Construction – The core development expenditure (DE) allocation – excluding the c.MYR14bn 1MDB bond redemption – is MYR83bn vs 2022’s MYR71.6bn (+16% YoY). The percentage of DE allocated to the transport sector dipped to 18.1% in 2023F (2022: 23.1%) from 25.4% during a prepandemic 2019. The proposed study to reduce the cost of the Mass Rapid Transit 3 (MRT3) by MYR5bn will drag the timeline for contract rollouts – impacting the pace of job replenishments for contractors.
Meanwhile, the absence of any mention of a revival of the High Speed Railway, which could have reinvigorated the sentiment of the construction sector, is a disappointment.
Automotive – The auto sector received a fillip from the extension of tax breaks for EVs and their charging infrastructure. While the proposals will help to lift adoption rates, we note that EVs remain a small portion of total industry volumes.
Strategy – RHB still sees tailwinds for equity markets coming from a maturing monetary tightening cycle, cresting US inflation, a resilient US economy, the China re-opening story, and reduced domestic political risks. RHB said it can now add easing regulatory risks to these positives, as fears of punitive new taxes failed to materialise. While equity markets will still be buffeted by some volatility coming from softer macroeconomic and corporate data points, market weakness should be seen as opportunities to add to positions for the medium term. Forward valuations remain undemanding, with the FBM KLCI now at just 13.4x FY24F P/E.
Robust fundamentals are a key investment consideration, and we retain a preference for large-cap value stocks. We are overweight on banks, oil & gas, gaming, basic materials, NBFIs, healthcare, auto, and property.
