Malaysia outlook 2023: Has the Malaysian tiger reawakened?

2023 is anticipated to be a more positive year for Malaysian equities, with a steadier market forecast compared to the expected decrease in GDP growth

by IFAST RESEARCH TEAM / pic MUHD AMIN NAHARUL

IN VIEW of lower foreign ownership and intact fundamentals, we remain constructive about the local equity market’s future growth. It is anticipated that 2023 will be a more positive year for Malaysian equities, with a steadier market forecast compared to the expected decrease in GDP growth.

2022 has been a challenging year for investors. It marks the end of the low-interest era, as the Bank Negara Malaysia (BNM) hiked the Overnight Policy Rate (OPR) rate four times in a row amid a five-year high inflation rate. At the same time, we have witnessed an impasse in the dramatic political developments in the recent 15th General Election (GE15). On the other part of the world, global macro paints the same daunting picture, driven by a potent mix of mounting fear over recession risks and intensifying geopolitical tensions among major economies.

Revised GDP and Unemployment Rate

For the Malaysian economy, we are still enjoying the benefits of the post-pandemic reopening, which has boosted domestic economic activity, as proven by the accelerating latest third quarter 2022 (3Q22) GDP at 14.2% year-on-year (YoY) (compared to a three-year average of 3.17% YoY). In the meantime, the market is recovering, despite a higher number of people in the labour force, with a 3.6% YoY unemployment rate (compared to a three-year average of 4.28% YoY).

It is encouraging to see the Malaysian economy growing at a rapid pace; however, we believe we are near the end of the rally. The recent GDP surprises were mainly contributed by the reopening catalysts coupled with the low base effect from the previous year. As we approach post-pandemic normalisation, the impact of domestic reopening benefits will start to diminish gradually. In addition, the challenging global environment will continue to be a headwind for the nation to grow significantly, as we have experienced this year.

Core Inflation Will Remain High

Malaysia’s inflation rate has been well-controlled earlier in 2022 despite the sudden inflation spike in some of its regional peers, thanks to the government’s generosity in cash handouts such as Bantuan Keluarga Malaysia and fuel and food subsidies over the years.

However, the story has changed.

The previous Malaysian government led by the Perikatan Nasional (PN) announced the removal of ceiling prices for some daily necessities, while maintaining cash assistance policies. Even though the ruling party has changed to the Pakatan Harapan (PH)-Barisan Nasional (BN) coalition since then, we anticipate that the gradual subsidy removal policies will remain and will eventually switch from a blanket to a more targeted subsidy programme. The new government’s top priority appears to be striking a balance between social welfare, particularly for low-income groups, and ensuring sustainable economic growth to regain investors’ confidence in this undervalued country.

Large amounts of government funds have been spent to address the impact of the pandemic in 2020 and 2021. However, heading into 2023, we think the government is likely to pledge its fiscal discipline to control the widening fiscal deficit. As of the time of writing, Malaysia recorded a RM21.1 billion budget deficit in 3Q22, higher than its three-year average of RM18.2 billion coupled with a 70.6% debt-to-GDP ratio.

We anticipate a continuation of the cash assistance programme as we have seen in the previous Budget 2023, but with a lower amount or reduced frequency to minimise the government’s fiscal burden to some extent. However, in order to control the widening fiscal deficit, the abolished subsidies are unlikely to be reversed completely, even at the cost of sacrificing consumer welfare. While constrained household spending power may limit inflation growth to some extent, sticky prices including daily necessities and labour costs continue to be pillars that prevent inflation from falling drastically.

Investors held out hope for rapidly easing price pressures as recent inflation data came in better than expected. They could be disappointed: We believe inflation may prove stubborn and that even a recession may not be able to bring down inflation. Buckle up, inflation will take much longer to moderate than you think.

Political Stability Fortifies Investors’ Confidence

It is expected that the economic policies implemented by the prime minister will have a socio-democratic focus, although they may need to align with the policies of the political allies of the ruling party — BN, Gabungan Parti Sarawak (GPS) and Gabungan Rakyat Sabah (GRS). In contrast to past manifestos, PH has refrained from making 100-day promises, likely due to lessons learned from past mistakes.

Since GE15, the government has taken several initiatives, including reducing special draws for number forecast operators (NFOs), postponing several flood preventions projects and reviewing 5G deployment plans through Digital Nasional Bhd (DNB). Although these policy reviews could lead to short-term concerns as the market often dislikes uncertainties, we believe more certainties will come after the Umno general assembly and the announcement of the new Budget 2023, which are expected to occur by the end of January 2023. Additionally, the state election in PH-led states, expected to be held at the end of 2023, will be a report card for the unity government’s achievements throughout the years.

Malaysia Sectors Outlook 2023

Financial — We anticipate that the current high-interest rate environment will continue to drive growth in the financial sector in the coming year. Despite the potential challenges of an economic slowdown and increased competition in current account savings accounts (CASA) and savings deposit spaces, we believe that the financials, particularly the banking sector, remains a strong and relatively safe investment option due to its strong fundamentals and defensive characteristics. The absence of the prosperity tax, lower provision losses, coupled with a widening net interest margin and strong asset quality in loan books, are likely to offset any losses from increased competition in savings deposits. While the potential for upside may be limited as the peak of interest rates in 2023 is already widely expected, we still favour this sector as a defensive play for investors to withstand market volatility.

Consumer Product — We anticipate that the new government will continue initiatives to reduce the cost of living, especially for the bottom 40% income group (B40) and middle 40% income group (M40), which will continue to support the domestic consumer sector amid rising inflationary pressure.

Energy — Petroliam Nasional Bhd (Petronas) announced that it will increase its 2022 capital expenditure (capex) from the initial RM40 billion to RM60 billion, which will be the highest capex since 2015. Given the favourable conditions of high oil prices, higher Petronas capex and a tight floating production storage and offloading (FPSO) market, we continue to favour upstream players, especially those with long-term orderbooks and good execution records.

Key Takeaway

In view of lower foreign ownership and intact fundamentals, we remain constructive about the local equity market’s future growth. It is anticipated that 2023 will be a more positive year for Malaysian equities, with a steadier market forecast compared to the expected decrease in GDP growth