5th Oct 2013
KUALA LUMPUR (Oct 5): The pre-budget rally on the local FBM KLCI that is generally expected a week or so before the tabling of Malaysia’s Budget may be short lived this year if the US budget and debt crisis continues, according to Affin IB vice president and head retail research Dr Nazri Khan.
In an email reply to theedgemalaysia.com last Friday, Nazri said assuming big positive impacts on key beneficiaries (likely winners construction, consumer, power & oil gas stocks) and minimal negative impacts on other sectors (likely losers banking & PROPERTIES stocks), the FBM KLCI should trend towards a range of between 1,800 and 1,820 points before Budget 2014 on Oct 25.
“We expect budget measures to arrest competitiveness and improve public finance to attract more investors’ confidence and foreign fund inflows back to Malaysia,” he said.
Generally, Budget 2014 should spur local market sentiment by introducing tough measures to boost trade competitiveness, improve fiscal credibility, address the recent downgrade by sovereign credit rating (such as Fitch Ratings) and encouraging stronger private sector participation to boost economic growth, he said.
Nazri said he expects Budget 2014 to focus on the implementation of subsidy rationalization programme (SRP), the implementation of services tax (GST) and extension of BR1M for the low income group.
“Generally, investors do not believe there will be significant Corporate and Personal Income Taxes cut due to government fiscal constraint but more incentives will be given to lower income groups using a very focus and targeted approach,” he said.
He said that as in the past, Budget 2014 should benefit construction sectors (especially those with low import content and high multiplier project owner).
“Higher multiplier such as MRT circle line 2 and 3, Southern Double Tracking and even the proposed Kuching-KK Pan Borneo Highway may kick-start but big ticket high import items like Kuala Lumpur-Singapore High Speed Rail and third interchange linking Johor and Singapore could be delayed,” he said.
Nazri said that there was a real possibility that Budget 2014 may launch National Healthcare Project (something like Australia's Medicare System and UK NHS) that will provide every Malaysian with access to quality healthcare.
He said healthcare stocks such as IHH, KPJ, Faber and TMC Life should benefit.
“Further, using Budget 2013 trend, Budget 2014 should again promote local tourism sector which means healthcare sector via medical tourism again will benefit,” he said.
Nazri said the implementation of GST should benefit software providers, adding that stocks like DKSH, Censof and MyEG should win contracts while telcos that have been paying govt sales tax can now shift the tax burden to customers under GST.
Hence, all three telcos Maxis, Axiata and DiGi will benefit, he said.
On the negatives of Budget 2014, Nazri said there could more subsidy cuts which includes more increase in fuel prices (possibly additional 10 to 20 cents), more increase in gas & electricty power tariff as well as hikes in sugar prices.
He said such moves should generally be negative for consumer/glove stocks (retailers like Nestle, Amway and Dutchlady & gloves such as Hartalega, Kossan, Supermax who use gas and raw materials) while positive for utilities stocks such as Tenaga, YTLPower and GasMsia (due to lower inputs, more efficient energy consumption and better earning visibility).
He also said the Budget could impose higher sin tax to boost government revenue.
“Tobacco players such as BAT and JT International and possibly brewery such as Carlsberg and Guinness earning are expected to contract,” he said.
He added that banks and properties could be mildly affected by more government properties-cool-down and bad-debt-measures (involving house, property, automotive and personal loans).
“Softer retail/corporate loans are therefore expected due to higher stamp duty, foreign cap, tougher RPGT (real properties gains tax) and higher loan-to-value (LTV) ratio for property purchases and shorter the personal financing tenure,” he said.
Finally, Nazri said oil and gas stocks should get positive catalyst.
“Due to depleting oil reserves, we expect government to encourage more participation in the downstream O&G industry which may include huge investment tax allowance for refinery activities to boost the downstream segment.
“This will also attract investors to participate in Pengerang Integrated Petroleum Complex to ensure its successful take-off. Petronas linked stocks such as Petronas Chemicals, Sapura Kencana, Uzma, Deleum, Perisai and others should benefit,” he said.
Meanwhile, M & A Securities head of research Rosnani Rasul said despite the seemingly negative outlook in the next 1-2 weeks, investors were advised to continue investing in the equity market as there was no change to the underlying fundamentals.
She explained that fundamentals were intact, chiefly thanks to the continuation in the US asset purchases program that will continue to oil the market in the short term.
“Until and unless the US is dovish on when they are going to taper on its quantitative easing, we see no reason for the investors to pull out from the equity market. There will be noises along the way but investors should not take their eyes off the equity market.
Rosnani said some events were unfolding so swift and fast that require investors to keep tab on the latest the development, concluding that it pays to be ahead of the curve.
[Source]
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