Weekly Market Update - 26 October 2015

Market Outlook

Equity Market Outlook

• We expect market to remain buoyant after the People’s Bank of China (PBOC) cut interest rate and banks’ reserves requirement. There is also the prospect of a possible further quantitative easing (QE) by the European Central Bank.
• Strategy: We are still focused on selected industries that will benefit from the weak MYR and the construction sector which will benefit from the on-going government spending.
• We view the 2016 Budget as neutral to the overall market. The 2016 Budget summary and the impact on respective sectors are as follows:
  • Expect GDP to grow by 4-5% in 2016
  • Fiscal deficit to be maintained at -3.1% level
  • Increase the tax rate to 26% for annual chargeable income RM600k to  RM1m while 28% to those above RM1m.

Consumer Sector 
Budget: Slight increase in BR1M handouts.
Impact: Benefit consumer sector as a whole, with impact likely to be felt more for staples, sin sectors and low ticket item discretionary goods.

Manufacturing
Budget: Higher minimum wage from RM900 to RM1000.
Impact: Negative for all manufacturers and plantation sector, impact heavier for labour intensive companies. To see cost increase and lower margins. Relatively neutral on manufacturing companies as average wage paid is already above the minimum threshold.

Property Sector
Budget: RM1.6 billion allocated for PR1MA to build 175,000 homes to be sold at 20% below market value as well as RM200 million to help pay deposits for first-time owners of affordable homes.
Impact: Benefit developers with track record of constructing PR1MA developments.

Telecommunications
Budget: Prepaid GST to be compensated by free minutes and SMS for 2016.
Impact: Slight negative for mobile telco operators especially Digi due to its large presence in the prepaid market.

Budget: Increase national fibre optics and undersea cables as well as RM1.2Bn allocated to boost the Internet speed from 5 mbps to 20 mbps.
Impact: Positive for fixed line operators such as TM whom is likely to be awarded with the contract to roll out the last mile delivery due to its previous track record for HSBB.

Tourism
Budget: E-Visa application with India, China, Nepal, Sri Lanka and Canada to begin next year.
Impact: Ease the visa application process for tourists. Will likely see increase in number of tourist from these countries. Potential beneficiaries include MAHB, Shangri-la.

Oil & Gas
Budget: Oil prices seen averaging at US$50 per barrel in 2016.
Impact: Negative for O&G sector as a whole. As Budget 2016 is based on a lower average oil price of US$50/ barrel versus 2015’s of US$55/ barrel, there could be further cutbacks in capex spending by Petronas and possibly slower activities in the oil and gas sector.

Budget: Petronas to spend RM18 bil for RAPID project in 2016
Impact: This is in-line with the Government’s revised budget of RM89 bil to develop the RAPID project, and dissipates fears of a slowdown in activities in Pengerang, and a further delay to the completion of the refinery and petrochemicals complex.

Construction
Budget: Development expenditure for 2016 is set at RM 50bn (+3% YoY).
Impact: This is positive for construction given the strong correlation (76.3%) between development expenditure and construction GDP. Construction GDP growth is expected to be at 8.4% for FY 16.

We believe that the growth in the construction sector will be supported by the construction work of MRT 2 (RM28bn), LRT 3 (RM10bn), BRT (RM2bn), Pan Borneo Highway (RM16.1bn), RAPID Pengerang (18bn), highways (DASH, SUKE) and affordable housing. 


Generally, a non-event as there is no major surprise. Below is a short summary of the impact on respective sectors.

Fixed Income Outlook 

• Rates ended the week relatively unchanged as the market players were waiting for Budget 2016 to be tabled on Friday late afternoon. 2016 budget deficit to stand at 3.1% of GDP, lower by 0.1% from target budget deficit of 3.2% of GDP in 2015, fairly in line with Government's plan to achieve a balanced budget of 0.6%-1.0% of GDP by 2020. We continue to see higher issuances in Government Investment Issue (GII) space compared to Malaysia Government Securities (MGS) as more interest were seen in GII issuances after the inclusion of GII in Barclay’s Global Aggregate and Asian-Pacific Aggregate Indices.

Source: Lipper for Investment Management, as at 23 October 2015
 

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