Budget 2018 boosts sentiment

BUDGET 2018, on the whole, boosts sentiment and competitiveness.

“It may not have big surprises or catalysts for the market; being an expansionary budget, but it will be positive for sentiment,” said Danny Wong, CEO of Areca Capital Sdn Bhd.

“The budget is oriented towards sustaining economic growth and stimulating domestic investment,” said Lee Heng Guie, the executive director of the Socio Economic Research Centre.

There are wide-ranging tax and non-tax measures aimed at drawing investments into new areas of growth that include the digital economy, eco and medical tourism, as well as logistics.

The principal hub tax incentive will be extended until December 2020, and RM200mil will be allotted to the high-end strategic fund under the Malaysian Investment Development Authority. “The investment in key accessibility and connectivity projects – rail, roads and broadband network – will help to raise the level of transportation and ICT connectivity, and boost competitiveness,” said Lee.

In terms of skills enhancement, the continuing focus on re-skilling and up-skilling programmes underscore the commitment to meet the growing demand for skilled and multi-skilled workers.

“However, the budget is short of giving an outright reduction in the corporate income tax rate as part of an overall tax reform package which will align Malaysia’s tax structure with its regional peers.

“The worldwide trend is to move towards a simpler and more competitive tax rate. Even the advanced countries are jumping on the bandwagon to lower their corporate tax rates.

“This shows a growing consensus against the disruptive and detrimental impact of excessive direct taxation,” said Lee.

“In Budget 2017, the company income tax rate was reduced by 1% to 4%, based on percentage increases in chargeable income (between 5% and 29%, or more) compared with the immediate previous year of assessment. This new tax rate structure applies for the years of assessment 2017 and 2018. However, the incremental impact is less effective,” said Lee.

With economic targets within expectations, some sectors stand out.

“The construction sector continues to be well-supported with an expected growth rate of 7.5%, underpinned by the commencement of the East Coast Rail Line beginning of 2018. The building materials sector should also get a lift. Bonuses for civil servants and tax cuts for the middle class should boost the consum- er sector,” said Yap Pink Keat, head of portfolio management at Fortress Capital.

“The cut in the effective tax rate and the benefits to Federal Land Development Authority (Felda) smallholders and civil servants will provide a multiplier effect,” said Vincent Khoo, head of research at UOB Kay Hian. (The Government is to refund cess paid by Felda rubber smallholders for oil palm planting from 2010 to 2016, totaling RM43mil. A special payment of RM1,500 has been given to civil servants. Lower tax rates have been extended to households earning less than RM9,000 per month).

Interesting touchpoints include the creation of an alternative trading platform (ATS), the fast-tracking of the MRT3 and the elimination of toll at the Eastern Dispersal Link, Johor, added Khoo.

(The ATS is a market venue that brings together buyers and sellers of securities, as an alternative to the traditional exchange. Construction of the MRT3 or Circle Line, set for completion in 2025, is to be expedited).

“The measures should support the ringgit in the medium term, but in the short term, (strong) US dollar factors will have to play out first,” said Hor Kwok Wai, the chief operating officer of Hong Leong Bank.

With Brent oil hitting US$60 per barrel on expectations of an extension of production cuts, the question which arises is: Is the oil party for real?

“The oil price has stabilised. The price may overshoot for a while, but a higher price is unlikely to sustain as output may increase to take advantage of it,” said Wong.

“The oil price is range bound. We do not foresee a breakout above US$60 per barrel for Brent,” said Khoo.

“All signs point to stable and improved oil prices in 2018, supported by global growth, stock rebalancing and cut in output,” said Lee.

China may be consuming more oil than official data shows, said Bloomberg, quoting analysts from Barclays.

Citing satellite data from Ursa Space Systems, they pointed to a stockpile about two-thirds lower than the one million barrela-day rise suggested by government data from April through August.

As president Donald Trump’s administration sets to introduce tax legislation this week, all eyes are on the tax-cut rally on Wall Street.

Any decline would be the first significant sell-off of the year, but would not likely be near the 20% decline that signals the start of a bear market, Edward Perkin, chief equity investment officer at Eaton Vance, was quoted as saying by Reuters.