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Optimism on the rise

Outlook for Malaysia has improved as global economy sees synchronised expansion

DESPITE the ongoing political drama, there are good reasons to be optimistic about the growth prospects of Malaysia for the remaining part of the year.

For one thing, the world economy seems to have converged in a synchronised growth upswing for the first time since the 2008/09 global financial crisis. This certainly bodes well for the country’s exports.

For another, indicators are showing that domestic demand, driven by private spending and investment, will continue its robust growth in the forthcoming period. This will underpin the medium-term outlook for Malaysia’s economy.

The optimism is palpable.

With external and domestic factors seen working in the favour of Malaysia’s economy, most economists have in recent weeks upgraded their growth forecasts for 2017 and 2018, while the government will likely do the same in the upcoming tabling of Budget 2018.

According to Treasury secretary-general Tan Sri Dr Mohd Irwan Serigar Abdullah, the government is currently in discussion with the Economic Planning Unit and Bank Negara to see whether there is a need to revise the country’s gross domestic product (GDP) growth forecast in Budget 2018, which is scheduled to be tabled on Oct 27.

The official 2017 GDP growth forecast for Malaysia at the moment still stands at 4.3%-4.8%.

But Irwan told reporters over the week that there is a likelihood that the country’s economic growth in 2017 will come in at 5% or more as a result of the strengthening economic environment.

And if that’s true, it will represent quite a strong acceleration from last year’s GDP growth of 4.2%.

Suffice to say, the increasingly positive outlook on Malaysia’s economy will support the strong performance of the country’s equity market and draw foreign interests in the domestic financial markets. This, in part, is expected to contribute to the strengthening of the ringgit towards the end of this year.

Positive prospects

The roaring start to 2017 – with Malaysia registering a robust 5.6% GDP growth in the first quarter, which is the strongest quarterly growth in two years – has prompted many economists to upgrade their forecasts for the country’s economy.

At present, Nomura Securities’ projection appears to be the most optimistic. The brokerage, which has revised its 2017 GDP growth target for Malaysia twice this year, now pegs its estimate at 5.3%, up from the previous forecast of 4.8%.

Besides Nomura, other institutions that expect Malaysia’s GDP growth to exceed 5% this year include RAM Rating Services Bhd at 5.2% and MIDF Research and TA Securities at 5.1%.

At a recent press briefing, Nomura senior economist for South-East Asia, Euben Paracuelles, says the group has positive view on Malaysia’s economy, and it does not expect domestic political issues to pose any major shock to investors.

“Economic activity in Malaysia in the second half of the year will be driven by exports, which will continue to be led by the technology sector,” Paracuelles says, adding that export growth is expected to have spillover effects on employment and private consumption.

Cautiously optimistic

Similarly, AllianceDBS Research chief economist Manokaran Mottain says the continued expansion in exports and resilient private consumption and investment growth will underpin Malaysia’s economic growth.

While the GDP growth momentum is expected to be slower in the second half of 2017 compared with the first half of the year, Manokaran says the overall growth will still come in at a robust rate of 5%, which is an upgrade from his earlier forecast of 4.8%.

“The growth momentum is expected to be slower going into the second half of the year, as export growth starts to normalise… but overall, the full-year growth this year will still be stronger than last year,” Manokaran explains.

“Even so, our stance remains cautiously optimistic, as we are wary of the downside risks emanating from increasing trade protectionism, volatility in oil prices, geopolitical conflicts and uncertainties in China and the US economy,” he adds.

Also wary of the current unpredictable global economic, financial and political landscape, Socio-Economic Research Centre executive director Lee Heng Guie cautions against being overly confident.

Although Lee has upgraded his 2017 GDP growth projection to 5% from the initial estimate of 4.6%, he says he remains cautiously optimitic about the country’s prospects, as there are still risks to growth, stemming primarily from the global front in the form of rising protectionism, geopolitical developments and commodity price volatility as well as reignition of financial market volatility and rising debt levels in the global markets.

“Growth in the remaining quarters of the year is expected to be slower given the dissipating favourable base effects, but the economy overall will continue to stay on a positive track this year,” Lee says.

“Growth will be broad-based, firing on twin engines of resilient domestic demand, particularly private-sector expenditure, and strengthening external demand,” he adds.

Bullish market

Meanwhile, the Malaysian equity market has registered encouraging gains since the beginning of 2017, as optimism over the country’s economic growth; and recovery in corporate earnings, commodity prices and the ringgit as well as expectations of the general election to be held this year drive investor sentiment.

In the first half alone, the FBM KLCI had gained about 7.4%.

The key benchmark index reached a year-to-date high of 1,796.8 points in the middle of last month, in part boosted by the huge inflow of foreign funds.

Data shows net foreign buying of Malaysian equities in the first half of this year totalled RM10.8bil. That’s a stark contrast to net foreign selling of local stocks at RM3bil last year and RM19.5bil in 2015.

The FBM KLCI yesterday shed 10.6 points to close at 1756.93.

According to TA Research head of research Kaladher Govindan, the stock market is due for a mild correction after the good run in the first half of the year. The positive point is, the stock market is expected to resume its rally through the remaining part of 2017 after the minor correction.

“While mild corrections are expected in the second half of 2017 due to external noises arising from the US monetary tightening bias, weakness in crude oil prices and hiccups from China’s deleveraging process, market sentiment is expected to remain buoyant,” Kaladher says. “The price-earnings-ratio (PER) multiple is set to expand as we approach the tail end of this year in anticipation of a sustained rally prior to the general election, which is highly likely within the next three to nine months,” he adds.

Kaladher points out that the recovery in corporate earnings and the country’s improving economic fundamentals will support the equity market’s PER expansion as well as underscore the upward revision in earnings forecasts for the heavyweight banking sector and Malaysia’s GDP growth.

TA Research recently upgraded its 2017 GDP growth forecast for Malaysia to 5.1% from 4.5% previously.

Similarly, the brokerage also tweaked its year-end FBM KLCI target to 1,890 points based on a revised valuation of 16.9 times 2018 PER, compared with its earlier target of 1,815 points based on 16.2 times 2018 PER. The revision is consistent with the PER expansion in election years and its upgrade in valuation multiples for banks, but the index target could extend into the first quarter of next year, if the 14th General Election (GE14) is held next year.

Historically, investors’ risk appetites have improved and PER multiples expanded during election years.

According to TA Research, the multiples averaged at 16.9x in the last four election years (excluding outlier 2008 due to the subprime crisis) and history is poised to repeat itself, mainly driven by sentiment.

“With shrinking time window (for GE14 to be held), expectations for the improved risk appetite during election years will remain alive and kicking, as the equity market is viewed as a yardstick to economic prosperity,” Kaladher says.

“If the election is held next year, Budget 2018 could be viewed as an election budget that is not only littered with goodies for the general populace but also sustained development expenditure and infrastructure spending that will benefit the construction and building materials players,” he adds.

Meanwhile, AllianceDBS Research says it expects the local stock market to be range-bound between July and September, before picking up in the last three months of the year on election optimism.

“Market is expected to take a breather after a spectacular 7.4% return in the first half of 2017 as we head into the third quarter, which is historically the weakest quarter in terms of market return,” AllianceDBS head of research Bernard Ching says.

Nevertheless, he stresses, improvements in economic fundamentals and corporate earnings are expected to remain intact.

“We believe a much vibrant fourth quarter, which is historically the strongest quarter, as the Government unveils its last budget in October before it calls for a general election that is due in 2018,” Ching says.

AllianceDBS Research maintains its end-2017 FBM KLCI target of 1,800.

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