PETALING JAYA: Previously neutral, Nomura Research is now “underweight” on the outlook for Malaysia’s equity market over the next three to six months.
The international brokerage cited poor macro/micro fundamentals and lack of major expansionary reforms so far as reasons for the downgrade in its recommendation.
“Since May of last year (when we downgraded Malaysia to ‘neutral’ after the elections), we have held a ‘neutral’ on Malaysian equities largely premised on the thesis that ‘reforms prospects’ could keep the multiples elevated despite micros and macros not being very supportive,” Nomura Research said in its “Asean Strategy: 2019 Outlook” report.
“However, with the new government more than six months in power already, while there have been efforts to fix fiscal leakages, there has not been a significant reform push which can potentially lead to expansionary economic activity,” it explained.
Nomura Research pointed out that amid the deterioration of Malaysia’s macro/micro background, the country also had to contend with weak oil prices, which could result in further challenges in plugging the fiscal gap that had opened up after the new government’s populist moves such as zero-rate goods and services tax and reintroduction of fuel subsidies.
“Our economists believe there is a high risk of fiscal slippage and the possibility of a sovereign ratings downgrade that could trigger more capital outflows,” it said.
On the reforms front, Nomura Research said it was hoping that the government would deliver more progress in areas to improve government efficiency, reduce corruption and crony capitalism and potentially roll back or ease the government’s presence in some areas to promote and create a level playing field with the private sector.
It pointed out that what had been lacking so far were reforms which could potentially lead to expansion of economic activity in the future (for instance, labour or tax reforms or the much-needed move to ease the property market bottlenecks).
On the politics side, risk premium seemed to be rising on various fronts, Nomura Research said.
It noted the recent elections at the largest coalition partner PKR, discontent at defections, and the media’s obsession with succession timeline for Prime Minister Tun Dr Mahathir Mohammed all seemed to be unnerving some investors, as it would take the government’s focus away from delivering on the reform agenda.
Nomura Research forecast Malaysia’s gross domestic product (GDP) to slow sharply to 4% this year from the expected 4.7% for 2018 on weak exports.
In addition, it expected Malaysia to post higher fiscal deficits of 3.9% of GDP in 2018 and 3.7% of GDP in 2019, compared with the government’s budget estimates.
Nomura Research said slowing growth and inflation could force Bank Negara to cut the benchmark interest rate by 25 basis points this year from the current 3%.
Micro-wise, the brokerage said it expected corporate earnings growth to continue to disappoint expectations.
It noted that consensus expectations of earnings growth rate for next year appeared quite modest at 4.6%.
“This is amid relatively high market valuations where MSCI Malaysia is currently trading at 15.8 times (some 4% higher/in line with post-Global Financial Crisis averages), and now the third most expensive market in Asia ex-Japan,” Nomura Research said.
Nevertheless, it believed Malaysia would continue to be a stock-pickers’ market.
“Within the market, we like select defensive banks (also an indirect play on consumption), some value plays like Gamuda Bhd and thematic plays such as Malaysia Airports Holdings Bhd (tourism) and Vitrox Corp Bhd (on strong earnings growth rate),” it said.
“We believe sustainable dividend yielding plays could be attractive as well in an environment where local rates are expected to be cut; and the government’s fiscal constraints may lead to higher dividends from government-linked companies,” it added.
Overall, Nomura Research has upgraded its recommendation on the Philippines to “overweight” from neutral, while remaining “overweight” on Indonesian equities and “underweight” on Singapore and Thailand equities.
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