Malaysia’s 2018 outlook: Economic growth momentum likely to sustain

After three quarters of above expectation GDP growth, several domestic and international organisations such as RAM Ratings Agency, Malaysia Institute of Economic Research, World Bank and International Monetary Fund have upgraded Malaysia’s GDP growth for 2017.

Consumer spending is likely to further improve as they are believed to have acclimatised to the GST system implemented in 2015 and the removal of cooking oil subsidy. Several proposals mentioned during Budget 2018 is likely to improve the average household disposable income which might subsequently lead to higher private consumption.

Government spending is likely pick up prior to General Election 14, underpinned by recovering crude oil price which may subsequently lead to higher revenue for Malaysian government.

Manufacturing sector as one of the drivers for Malaysia’s Industrial Production Index posted a healthy YTD growth of 6.1 per cent.

Both manufacturing sales and Purchasing Manager index are suggesting a strengthening manufacturing sector.

The local manufacturing sector which accounts about 23 per cent of Malaysia total GDP, is likely to continue its strong momentum underpinned by the external demands, especially from the E&E sectors given the recovery in Technology industry that might drive the demand on semiconductor products.

Thanks to the surge in local exports and the introduction of new FEA rules back then in late 2016, Malaysia’s international reserves have strengthened and surpassed the US$100 billion level.

According to the central bank, the current reserves level is sufficient to finance 7.5 months of retained imports and currently stands at 1.1 times of the short-term external debt.

This will translate to a stronger ability to weather external uncertainties. After several years of earnings downward revision, we have finally seen earnings being revised upwards in 2017.

Corporate earnings are likely to continue its momentum next year underpinned by strengthening external demand and recovering local consumption that might drive the local economic activity.

As of December 20, 2017, the P/E ratio for Malaysia’s equity market stands at 16.2x and 15.3x for 2017 and 2018.

Given the slight premium valuation for Malaysia’s equity market, earnings growth would be the major contributor to equity return, which is expected to come in at mid-single digit by end of 2018 – earnings growth for 2017 & 2018 are 6.5 and 6.8 per cent respectively.

We continue to see limited downside risk for Ringgit given the improving local economic condition which may lead to better valuation for various asset classes.

Accelerating foreign direct investment and the implementation of new FEA rules are likely to further enhance the demand for Ringgit.

Investors with foreign exposure should be cautious of possible FX losses should MYR strengthen from the current level. We continue to have a positive view on the Malaysia equity market underpinned by improving fundamentals of the local economy. Given the expectation of stronger corporate earnings and a better economic backdrop, the local stock market is expected to deliver a rather reasonable return for investment horizon over the next three years on a relative basis.

For investors who wish to gain exposure into the local equity market, they can look into Kenanga Growth Fund or Eastspring Investments Equity Income Fund. Investors who are looking to tap into these economy growth opportunities, they can consider InterPac Dana Safi, InterPac Dynamic Equity Fund and KAF Vision Fund which are investing into the small cap space.

In other Asean markets, namely Thailand and Indonesia, the robust exports figures coming from both nations support that the global economic recovery picture remains intact, and continues to benefit exports-reliant economies such as the Asean nations.

We are of the opinion that both nations’ economic outlook continues to be favourable as the conducive external environment persists and domestic conditions becomes healthier. As such, for investors who share the same view with us, they can consider Asean funds that are available in our platform.

For investors who are seeking higher equity market returns can consider Asian equities, which are still offering compelling value and higher expected upside at this juncture. To read more about activities in the market, log on to www. fundsupermart.com. By Fundsupermart.com Research Team