In its Malaysia strategy report, CGS highlighted the progress made by the unity government in driving the key policy initiatives that matter the most for the equity market.
“These are fiscal reforms (and a move towards targeted subsidies), accelerated development spending, and the National Energy Transition Roadmap (NETR). We assign an overall A- on the policy side so far, with room for improvement.
“On the policy side, there is clearly growing optimism about Prime Minister Anwar Ibrahim’s Madani Economic Framework – initiatives to move to a targeted subsidy regime, and aggressive development project plans that could raise the medium-term growth profile of the country,” it said.
However, it said implementation of these measures remains mixed, and hoped to see better project rollout in the coming months.
“We are encouraged by the FTSE Bursa Malaysia KLCI’s over 6% year-to-date gain to over 1,530 points, and maintain our aggressive year-end index target of 1,755 points,” it said.
It also noted that although the KLCI is up 12% from its June 2023 lows, the prices of several stocks within its coverage have surged by more than 100% in the past 12 months, while others have fallen 20%-60%.
CGS explained its bullishness on Malaysian equities is underpinned by its belief the key headwinds such as government policy and the weakening ringgit which affected the market between May 2018 and 2023 could collectively “turn into tailwinds” in 2024.
This included previously inconsistent and short-term focused policies turning into clear medium-term plans to consolidate the government’s fiscal deficit and aggressively expanding development spending to raise the country’s growth profile.
“Following steady weakness from around RM3.80/US$ in 2018 to RM4.72/US$ at end last year, our belief is that the domestic currency trend would reverse, underpinned by a shift from a strong dollar to a weak one,” it added.
On the earnings front, it said following a decline in 2022 and flat profits in 2023, its updated estimates point to a strong 15% pick-up in 2024F and a further 10% rise in 2025F.
Timely implementation of policy initiatives
CGS reiterated the next major leg up for Malaysia’s equity market needs to come from the policy side, with the ringgit’s appreciation providing further impetus in the second half (2H2024).
“While we remain encouraged by the significant initiatives put in place by the government in 2H2023, we think there is a need for timely and consistent implementation in 2024.”
It believes that meaningful progress in policy implementation would be the catalyst to push the KLCI to well over 1,600 in the coming months.
While it remains bullish on the domestic economy, the research house downgraded the “red hot property sector” to “neutral”, among its key recommendation changes.
“The KL Property index has risen 44% since our upgrade to ‘overweight’ in June 2023 and individual property share prices have risen by a lot more. While we remain constructive on the prospects for real estate in Malaysia, we feel tactically it is time to take profit on developers,” it explained.
CGS retained its “overweight” calls on construction, banks, telecoms, consumer discretionary, conglomerates and healthcare. It upgraded plantations from “underweight” to “neutral” and real estate investment trusts (REITs) from “neutral” to “overweight”.
“Meanwhile, construction stays ‘double overweight’ despite share price gains as we think expectations and valuations of many sector plays are still reasonable,” it added.