Malaysia’s Economic outlook for the second half of 2023 (2H2023) remains buoyant reflecting base effect factors after last year’s growth surge on full economic opening; deceleration in domestic demand growth, on the lingering and lagged effect of the high inflation and interest rates; and impact of global growth downturn (2023E: +2.7%; 2022: +3.4%) on external demand, meaning on the nation’s trade.
Maybank Investment Bank (Maybank IB) said today (July 13), they broadly maintained their macro forecasts and views in keeping with 2023’s real GDP growth forecast at +4.5% (1Q 2023: +5.6% YoY; 2022: +8.7%).
This was based on following BNM’s OPR pause at 3.00% after the July 5-6 MPC meeting which resulted in a “neutral” Monetary Policy Statement, receding inflation rate (2023E: +3.0%; 2022: +3.3%), and measures to stabilise Ringgit (end-2023: 4.50; end 2022: 4.40).
Maybank IB sees the OPR staying at 3.00% for the rest of this year.
Major macro risks which include whether the U.S. economy will soft-land or slump given Fed’s signal of additional Fed funds rate hikes; upside risk to domestic inflation given the Government’s fluid policies on subsidies and consumption-based tax; plus keeping an eye on the upcoming state elections pose as lookouts to gauge the direction of the Malaysia economy.
Malaysian equities
Maybank IB is cautiously optimistic on an improved market traction over 2H23 despite still-challenging earnings guidance.
Besides peaking interest rates, the upcoming state elections (in Aug) and Budget 2024 (in Oct) could positively surprise the political / policy follow-through as against what is deemed to be a current market depressed expectations.
Maybank IB’s FX team also expects a positive Ringgit reversal into 4Q23 based on China’s growth (and currency) outlook stabilises and Fed’s narrative turns more dovish.
KLCI heavyweights like Banks (NIMs bottoming in 1Q23) and Plantations (CPO price lift from firmer soy pricing, El Nino) have room to reverse YTD underperformance even towards the low-teens 2024E market earnings growth forecast comes into view.
There are expectations of tangible GLC Reform traction and trade/supply chain relocation which would be supportive of economic and market impetus.
Further, Maybank IB foresees companies ramping-up Sustainability initiatives and targets which bode well for sectors such as Auto (EV take-up, infra) as well as Renewables/Utilities (accelerated RE plant-ups, exports).
Following forecast adjustments following the 1Q2023 results, 2023E coverage universe earnings growth has moderated to +6.5% (from +13.6%) but is expected to strengthen to +13.3% in 2024E, as ASP-driven sectors (Plantations, Gloves, Petrochem) improve while laggards like Telcos, Gaming (Casino) and Aviation extend earnings recovery.
The bank cited that the revised end-2023 KLCI target is not at 1,520 (13x fwd. PER, -1.5 SD vs. mean), from 1,660 (14x/- 1SD) previously.
Maybank IB favours the financial sector (HLBK, RHB, ABMB), Tech (Software) (CTOS, ITMAX), EMS (ATech), Auto (Bermaz), Gaming (GENT(M)), Construction (Gamuda), Hospitals (IHH) and O&G (Yinson).
They remain selective on Plantations (KLK), Telcos (Telekom), REITs (YTL, Axis), Consumer (Mr.DIY, Padini), Tech (Hardware) (Greatech), Aviation (Capital A).
Key SELLs are Gloves (Top Glove, Hartalega, Kossan) and NFOs (Magnum, SPToto).
Clearer Skies Ahead
Anticipating market traction despite earnings stresses contrary to relatively optimistic expectations at the start of the year, as detailed in 2023 Malaysia Equities Outlook report “A New Hope”, Maybank IB stated that macro, corporate earnings and political concerns have persisted in 1H23, with long-apparent disconnect between resilient GDP growth (1Q: +5.6% YoY; 2023E: +4.5%) and an underperforming KLCI particularly stark.
Key pressure points sapping investor confidence include a re-tabled Budget 2023 that was silent on urgent fiscal concerns re subsidies (too high) and tax base (too narrow), relentless net foreign selling (for a 10th consecutive month in June), “barometer” state elections slated for Aug, an exceptionally weak Ringgit and underwhelming corporate earnings, with 1Q23 reporting representing a 2nd consecutive quarter of QoQ and YoY earnings decline.
Nonetheless, with KLCI forward PER (c.12x) now at post-millennium lows, and both domestic and foreign risk factors looking to have peaked, market valuations have room to expand over 2H23 notwithstanding still-volatile earnings outlook.
Maybank IB reiterates their moderated end-2023 KLCI target to 1,520 (+10%) and retain a balanced positioning via a mix of value and growth stock, with continuing yield focus.
Note that the KLCI was the second-worst performing benchmark in the region over 1H23, declining 7% and 13% in Ringgit and USD terms, respectively. Negative contrast vis-a-vis resilient GDP momentum – 2023E expansion forecast at +4.5%, after 2022’s +8.7% reopening-boosted rebound – has been accentuated by uncertain policy timeline and execution re likely-disruptive subsidy and tax base changes, an exceptionally weak Ringgit poorly explained by interest rate differentials and /or foreign portfolio flows (net positive for 5M23 on heavy inflows into Ringgit debt) and pending state elections in Aug (Fig 45) which, should PM Dato Seri Anwar Ibrahim’s unity government perform poorly, could potentially derail essential fiscal and governance reforms, and rekindle speculation on the staying power of the federal government.
Further, risks on weak corporate earnings delivery are to the downside given a combination of weakening demand, pressured ASPs and extended margin pressures.
2H23 outlook: dissipating overhangs to narrow discount
Maybank IB, overall, are cautiously optimistic on improved market traction over 2H23 despite mixed earnings guidance. Besides peaking interest rates, upcoming state elections and Budget 2024 (Oct) could surprise positively re political / policy follow-through vs. current depressed expectations. Other sector positioning and top picks favoured include Tech (Software) (CTOS, ITMAX), EMS (ATech), Auto (Bermaz), Gaming (GENT(M)), Hospitals (IHH) as they remain selective on Plantations (KLK), Telcos (Telekom), REITs (YTL, Axis), Consumer (Mr.DIY, Padini), Tech (Hardware) (Greatech).
