The US$/ringgit may rise to 4.2 in next three months vs 3.95 on May 8.
KUALA LUMPUR: Affin Hwang Capital Research believes the newly formed government under Pakatan Harapan (PH) presents an opportunity as it is comprised of a group of senior ministers with strong credibility.
It said on Friday that in the intial stage, there is the possibility of short-term capital outflows because of policy uncertainties.
However, it pointed out that once the dust settles, focus should return to: 1) the country’s fundamentals, in which we see negligible negative impact from the PH-run government; and also 2) corporate earnings, which should continue their positive momentum and register a second consecutive year of growth (2018 estimated FBM KLCI growth of 7.0% from 2017: 9.5%).
“Our positive thesis on the market is still underpinned by our belief that the ringgit remains undervalued. Maintain Overweight and our year-end KLCI target of 1,923 (based on a price-to-earnings of 18.6 times or +1 standard deviation mean),” it said.
Affin Hwang Research said post a potential near-term market shock, it expects focus to be on the stronger middle-income segment, and thus benefiting the consumer (upgrade to overweight from neutral) and the auto & autoparts (upgrade to overweight from neutral) sectors.
“We also make changes to our stock selection, removing Hong Leong Bank and Genting Malaysia from our top Buys and replacing them with Sime Darby (Automotive exposure), which we upgrade to Buy in this report, and Aeon Co
(Consumer exposure),” it said.
To recap, on Wednesday, PH created Malaysian history by winning the 14th Malaysia General Election (GE14), taking over the Barisan Nasional (BN) coalition, which has ruled Malaysia since its independence in 1957.
Of the total 222 Parliamentary seats, PH took a majority of 122 seats while Barisan Nasional and PAS, 79 and 18 seats respectively.
“The results strongly affirm the population’s preference for PH, which garnered a 55% victory compared to BN’s previous control of 60% of Parliamentary seats in GE13,” it pointed out.
Affin Hwang Research said that from a macro perspective, the immediate focus will be on how the new government addresses policies and strategies to improve business and consumer sentiment and private investment growth trends.
The market will also be focusing on PH’s strategies to fix the government’s fiscal deficit position, with the abolishment of the goods and services tax (GST), as highlighted in its manifesto for GE14.
“We, however, believe that the PH Government will likely maintain its real GDP growth forecast range of between 5.5-6.0% in 2018 (5.9% in 2017), as compared to our forecast of 5.3%,” it said.
Impact on the economy
The research house said from the market's perspective on the future country’s economic growth and financial market performance, the immediate focus of investors will be on how the new government addresses policies and strategies to improve the business and consumer sentiment and private investment growth trends.
This is due to concerns that some of the government-funded construction/infrastructure projects may be reviewed going forward.
PH has indicated that it plans to review public-sector projects to ensure transparency in contract awards, which will likely lead to delays in the implementation of planned projects such as the Klang Valley MRT Line 3 (MRT3), Gemas-Johor Bahru Electrified Double Tracking (EDT) and KL-Singapore High Speed Rail (HSR).
The market will also be focusing on PH’s strategies to fix the government’s fiscal deficit position, with the abolishment of the goods and services tax (GST), as highlighted in its manifesto for GE14.
GST has become an important source of the BN Government’s revenue since its introduction from April 2015, following the decline in government oil revenue.
“While the PH government has unveiled its fiscal reform review plan, we believe any fast-action plans to address the deficit position concerns will safeguard and maintain the country’s sovereign credit rating outlook by the international rating agencies.
“In our opinion, the risk of the country’s sovereign rating outlook being downgraded is small, as we believe the PH government will likely cut operating expenditures and demonstrate its commitment to fiscal consolidation as well.
“All this also depends on how the PH government initiates immediate actions to generate economic activities in taking steps toward long-term economic growth and sustainability,” it said.
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