Market may react positively to budget

This article first appeared in The Edge Financial Daily, on October 30, 2017.

The Malaysian stock market is likely to receive positive reactions from investors today as they react to goodies from Budget 2018 that was unveiled by Prime Minister Datuk Seri Najib Razak last Friday.

Analysts, however, are of the view that the mood or excitement on Bursa Malaysia will be mild given the absence of strong catalysts for growth in the national budget that could help the out-of-steam market stage a turnaround.

According to Areca Capital Sdn Bhd chief executive officer Danny Wong, the budget removed one uncertainty and provided some relief in the market even though it revealed few catalysts to excite investors.

Wong views the budget as a “non-negative surprise” and while it may not be a strong catalyst for the market, other developments such as the earnings reporting season for the third quarter (3Q), which just got underway last week, and election news could potentially set off a market rally towards the end of the year.

“While the budget in itself does not provide a strong catalyst for the market, the tone of it is of an expansionary budget, which is something that has not been seen for quite a while. It is good as it signals confidence of a better growth moving forward,” he told The Edge Financial Daily.

“The fact that it’s not a negative budget is good news for us. The upcoming 3Q [earnings season] could be vital, and I expect it to be better than 2Q given how the economic growth is showing a strong momentum. The 2Q results were disappointing and it was likely due to the lagging effect. If the economy continues to grow above the 5% range, the earnings will catch up and the market will react to it eventually,” Wong noted.

He believes the sell-off of Malaysian stocks is overdone and that the benchmark FBM KLCI should play catch-up with its regional peers in tandem with a stronger economic growth.

For Wong, the construction sector remains the main theme in the stock market for the year and he does not expect to see much surprises from the contracts awarded, especially the mainstream construction projects and those in Sabah and Sarawak. He also pointed that sectors such as building materials and those involved in financing these construction projects might benefit from it.

“Apart from construction, I’m confident of the consumer sector. I’ve [had] a positive view on the sector for quite some time now. While the budget has allocated quite a bit for the B40 (bottom 40 households) segment, I think it will not increase consumer consumption at a significant rate but with a more positive and buoyant mood as elections draw closer, it should benefit the consumer players as well,” he added.

Rakuten Trade Sdn Bhd research vice-president Vincent Lau concurred, saying Budget 2018 is mildly positive for the market. “The market should react positively to the budget. In my view, it (Budget 2018) has some positives and could provide the much needed catalyst for the market,” he said.

Lau cited measures that will strengthen the capital market include the duty stamp exemption for contract notes of exchange-traded funds and structured warrants for three years and the relief on tax imposed on venture capital companies, adding that they are a step in the right direction.

Lau said with Budget 2018 now out of the way, the much anticipated 14th general elections will be the key driving factor for the market.

He expects to see a recovery in the stock market in general and is positive about small-cap stocks.

Hong Leong Investment Bank Bhd (HLIB) head of retail research Loui Low is positive about Budget 2018, expecting the measures to help the market reverse its bearish trend.  “If you look at the market today (last Friday), it has responded positively to the optimistic budget speech by the prime minister, closing 0.5% or 9.33 points higher at 1,746.13 points. This was after the [FBM] KLCI had been on a downward trend since early August when it was trading slightly below the 1,790 points level,” Low said.

“The next wait is the elections. Prior to that, it would be the November reporting season. If you look at the GDP (gross domestic product) growth in Malaysia, it has been very good and this should translate into better earnings.

“More money is also expected to come from the goods and services tax, as well as oil revenue with [the] oil price stabilising,“ he added. Full-year GDP growth for 2017 is forecast at 5.2% to 5.7%, compared with last year’s 4.2%.

The government remains committed to lowering its fiscal deficit, with an aim to bring it down to 2.8% of GDP next year from an expected 3% this year. This is despite a higher allocation for both operating and development expenditure at RM234.25 billion and RM46 billion respectively.

In a report on the budget last Friday, HLIB Research said with no major surprises coming from the budget, it expects the market to move sideways before moving higher towards year end in anticipation of more domestic-driven catalysts in 2018. The research firm is maintaining its 2017 year-end FBM KLCI target at 1,760 points.

A fund manager with a local asset management is of the view that Budget 2018 is a non-event as reflected in the market decline in the last couple of weeks, with foreign investors turning net sellers as they moved into other markets that are more stable and certain.

“With Budget 2018 now announced, the investment community can now focus on the fundamentals and earnings of companies when it comes to investing. There will be some sectors that benefit from it, perhaps the property sector but when it comes to investment, we tend to take the long-term view. So, while the budget is important, it’s only important in terms of the uncertainties of what will be included.

“Now that it has been announced, there’s a feeling that the market is ready to continue its uptrend movement as seen at the beginning of the year with an eye on the anticipated elections,” he said.