With the new year approaching, now is a good time as any to identify what industry experts predict will happen in 2018.
For Malaysia, 2018 is shaping up to be the year for Malaysia to shine as one of the fastest growing economies in the Asean region.
In its 2018 outlook report by the research arm of Public Investment Bank Bhd (PublicInvest Research), Malaysia might be right on track to become the second fastest growing economy in Asean – trailing right behind the Philippines.
The report guided that in 2018, Malaysia would be growing from a position of strength with ample growth potential given its average growth of 6.3 per cent in the last 36 years.
“Not only is its growth rate enviable, but its ability to maintain the speed of growth is another factor that deserves credit,” it said.
This growth trajectory would likely be driven by domestic demand as the research arm projected domestic demand and private consumption to grow at 5.4 and 6.4 per cent respectively.
Based on this, PublicInvest Research expected Malaysia’s gross domestic product (GDP) to grow at 5.2 per cent – conservatively within the Ministry of Finance’s (MoF) projection of 5.0 to 5.5 per cent.
Similarly, AmInvestment Bank Bhd (AmInvestment Bank) has also announced that they expect Malaysia’s 2018 GDP to fall in line with MoF’s project at 5.5 per cent.
“With our 2018 GDP outlook at 5.5 per cent, we believe that the quarterly GDP growth should bottom around 1Q2019 before it starts picking up as the base effect fizzles out while the overall economic activity continued to be supported by domestic demand and exports,” concluded the bank.
While both forecasts are lower than the forecast GDP growth 5.8 per cent for 2017, PublicInvest Research opined that 2018 conditions would still be good enough to warrant continued investment in the Bursa Malaysia.
“Foreign investors may be less of a factor in the coming year, but that may be inconsequential given the ample domestic liquidity present,” said the research arm.
For specific industries, PublicInvest Research retained its overweight view on the oil and gas (O&G) and constructions sectors due to the on-going positive news flow of upcoming ventures and projects, and probable earnings uplifts.
Additionally, it pegged an ‘overweight’ call on the manufacturing sector as it is expected to see a surge in demand within the industry on the account of the strong global trade.
“We also suggest selective exposure into the banking sector as we see valuation to remain attractive at current levels.
“We think the sector is primed for long-overdue run post-MFRS9 clarity come
January 1, 2018,” added the research arm.
Meanwhile, the ringgit is expected to continue on with its steady growth, forecasted to be one of the fastest growing currency in the Asean region next year as Malaysia continues to gain support from advancement and stability in oil prices, steady current account surpluses and the receding political risks that will emerge after the 14th General Elections (GE14) has concluded.
Earlier in the year, the ringgit saw rapid recovery from its historic low of 4.48 against the US dollar to its present circa 4.10 levels.
“Based on our analysis, we think that the ringgit should be valued at RM3.75 to RM4.00 per US dollar – which is our long-term target.
“In the short-term, however, in 2018, we expect the Ringgit to average at RM4.00 to RM4.10 per US dollar against the 2017 average of RM4.33 per dollar,” guided PublicInvest Research.
On the other hand, AmInvestment Bank stated in a separate Global Currency Outlook report that their analysis showed the ringgit with a fair value of 3.95 against the US dollar while the real effective exchange rate presented a fair value of 3.76.
“There is still plenty of room for this laggard currency to gain momentum,” it said.
Expecting the ringgit to trade at 3.98 by the end-2018, the bank’s forecasted average for the ringgit against the US dollar is 4.12 – a substantial improvement from its forecasted average of 4.30 in 2017.
Additionally, volatility of the ringgit has also been receding noticeably to 0.17 per cent daily in 2017 from 0.59 per cent daily in 2016.
PublicInvest Research expects this trend to continue on in 2018 – diminishing the need for Bank Negara Malaysia (BNM) to intervene.
Nevertheless, if the need arises, the research arm opined that the central bank would have no trouble to combat swings in the ringgit due to their ample arsenal of foreign reserves.
GE14 to stage relief for local equity market
With the highly anticipated 14th General Elections (GE14) on the table next year, 2018 will definitely be a year to remember as it would either be the year where Barisan Nasional (BN) continues to defend its status as one of the longest ruling coalitions in the democratic world, or the year where we see a change in our ruling coalition.
Currently, the general consensus is that another BN win is on the cards but some staunch believers are of the opinion that there is very real possibility that the development of our GE14 may very well follow in the footsteps of the shock results of the 2016 US presidential elections.
If Pakatan does end up wining GE14, it will be uncharted territory as to how the equity market may react and players will have to tread carefully as they navigate through the new unfamiliar waters.
One thing for certain, however, is that if BN does continue its rule, analysts are confident that local equity market may stage another ‘relief rally’ post wrap up of the elections.
In a strategy report, MIDF Amanah Investment Bank Bhd (MIDF Research) guided that they are expecting the local equity market to exhibit a similar behaviour of recovery post GE14 as it had after the conclusion of GE13.
Explaining this expectation, the research arm pointed out that the FBM KLCI has been recently underperforming against its emerging Asean peers just as it did during the pre-GE13 months where the local market was clearly perturbed due to the uncertainties of the GE13 results.
However, once results were out with the BN federal government clinging onto power at 60 per cent of 222 parliament seats, the local equity market breathed a sigh of relief by staging a ‘relief rally’ where the FBM KLCI posted record high numbers on the following Monday after GE13.
“The local bourse surged 3.38 per cent to close at 1,752 points on post-election Monday. Furthermore, foreign investors loaded up RM1.43 billion net of Malaysian equity on the Monday after the election which has never been surpassed ever since.
“Despite the benchmark experiencing some pullbacks after the election where it retreated to circa 1,730 levels on the back of persistent foreign selling, pursuant to US Fed Chair Ben Bernanke’s previous quantitative easing taper statement, the FBM KLCI got back on track, posting an annual gain of 11 per cent with a total annual foreign net inflow of RM3.03b in 2013,” reported the research arm.
Explaining this phenomenon, the research arm asserted that the familiarity and predictability of a BN government was the reason why investors were given a sense of relief and allowed the local equity market to outperform its emerging Asean peers.
“Therefore, it is highly likely that the FBM KLCI will once again show a reversal of trend and outperform its regional peers if the federal incumbent were to remain in power post GE14,” they reasoned.
With expectations that BN will continue to cling onto power, MIDF Research has reiterated its FBM KLCI 2017 year-end target of 1,830 points which equates to PER17 of 17.1 fold and +1.1 SD.
“Likewise, we reaffirm our FBM KLCI 2018 year-end target of 1,900 which is equivalent to PER18 of 16.7 fold and +0.9SD,” they added.
Headline inflation moderates, OPR rises
With a growing economy, strengthening ringgit and stable fuel prices, Malaysia’s headline inflation is expected to continue moderating to 2.7 per cent in 2018.
According to research house RHB Research Institute Sdn Bhd (RHB Research), current headline inflation is demonstrating a trend of easing as it eased for the second straight month to 3.4 per cent year over year (y-o-y) in November.
The easing was mainly attributed to a slower rise in transportation costs that eased to 10.8 from 12.1 per cent, and food and beverage (F&B) costs that saw an easing to 4 per cent from 4.4 per cent.
“Likewise, prices of housing and utilities, furnishing and household equipment, education and healthcare all saw a slower increase during the month of November while prices of clothing and footwear and communication declined at a faster pace in November.
“These were, however, partly mitigated by the faster increase in prices at restaurants and hotels, and recreation services and culture during the month,” guided the research house.
Similarly, core inflation which excludes nine of the most volatile items of fresh foods, also some easing as it inched lower to 2 per cent y-o-y in November from 2.3 per cent in October and 2.4 per cent in August-September.
“This indicates that the underlying inflation remains weak and demand pressure stayed subdued,” explained the research arm.
Overall, the easing momentum is expected to continue into 2018 with RHB Research forecasting a 2.7 per cent headline inflation that is supported by a growing economy, stabilising fuel prices and a stronger ringgit – much lower than their estimates of 3.8 per cent for 2017.
“A pick-up in growth of domestic demand, as seen in economic growth numbers of late may however, offset the downward pressure,” added the research house.
And in light of these moderating inflation rates, the research house also reckons that BNM’s monetary policy stance will also be tilted towards the upside in 2018.
“We believe BNM would likely increase overnight policy rate (OPR) by 25 basis points to 3.25 per cent next year, in tandem with monetary policy tightening by major global central banks and with the Malaysian economy improving further,” said the research arm.
RHB Research’s prediction of rising OPR rates in 2018 is further justified as BNM has also previously implied that it may consider reviewing the current degree of monetary accommodation given the strength of global and domestic macroeconomic conditions.
O&G: Increasing oil prices but muted outlook
While there is a general consensus that crude oil prices will be on the uptrend in 2018, outlook prospects of the local oil and gas (O&G) industry will continue to be muted due to observed significant capital expenditure (capex) reductions from Petronas, increasing proportion of renewable sources for electricity generation and a growing adoption of fuel efficient electric vehicles.
In 2018, analyst AmInvestment Bank Bhd (AmInvestment Bank) has guided that they would be raising their project of crude oil prices by US$5 per barrel to US$55 to US$60 per barrel following the increased optimism post-continuation of OPEC’s production quota.
Similarly, Petronas is projecting an average of US$55 to US$60 per barrel while the EIA is forecasting US$57 per barrel for 2018.
“Oil at US$100 a barrel is a thing of the past,” said Petronas in its Petronas Activity Outlook 2018 to 2020 report which added that Petronas would continue adopting lower prices for the long term until there is restored confidence that the current uptrend of oil prices is sustainable.
The Petronas report went on to detail that their transparency on their shrinking capex which saw contract awards plunging 68 per cent q-o-q in 3Q17 to RM689 million, is aimed to help consolidate the local O&G industry – especially those in the upstream exploration segment.
“We need to reshape the Malaysian O&G ecosystem so that the companies that operate here will be more efficient, with the size and economies of scale that will also make them more resilient and competitive globally,” said Petronas’ president and group chief executive officer Wan Zulkiflee Wan Ariffin in the report.
Locally however, the Liquefied Natural Gas (LNG) and Oil and Gas (O&G) industry will continue to be the biggest contributors to the growth and business sustainability of our Bintulu Ports Holdings Bhd (Bintulu Ports).
Its group chief executive officer (CEO) Dato Mohd Medan Abdullah reaffirmed the group’s mission would be to continue to service the local O&G scene with a focus on LNG – the group’s main bulk of cargo handling.
“The group is always ready and has the capacity and capabilities to respond to any increase in offshore oil and gas activities, especially when such activities ramp up due to better oil prices.
“The increased production capacity to 29.3 million tonnes per annum at Petronas LNG Complex will have a positive impact on the port throughput and we will continue to discuss with Petronas to explore other services that may be provided at the port,” he said during a previous interview with The Borneo Post.
On October 4, 2017, Petronas celebrated its 10,000th cargo delivered to Japan from the Bintulu LNG Complex.
While it is clear that Bintulu Port is on track to become a top-tier LNG port within the globe alongside growing demand for LNG, Wan Zulkiflee warned that there would be a possibility of industry stagnation if LNG prices do not encourage the necessary investments to sustain the business.
“Today, players are cancelling and delaying projects in tandem with the LNG prices. Without sufficient investments, both buyers and sellers face an uncertain future in terms of business sustainability and energy security,” he said in a statement during the LNG Producer-Consumer Conference 2017 in Tokyo, Japan.
Nevertheless, he added that the current market dynamics had stimulated internal efficiency improvements that had provided Petronas with better agility as an integrated end-to-end LNG player to accelerate growth once the industry is on an upturn.
With deeper resource pools, Wan Zulkiflee guided that Petronas would be able to invest in people, technology and innovation to provide energy solutions that go beyond just selling and delivering LNG.
“Through these investments, we aspire to help create a more sustainable LNG market that is able to fuel the world’s economies,” he said.
Property crash or recovery?
For our property sector, it is no secret that its performance of late has been rather lacklustre, and in 2017, the situation has continued to deteriorate as the total amount of unsold completed residential units escalated to 20,807 units in the first half of 2017 – a shocking year over year (y-o-y) increase of 40 per cent.
According to Deputy Finance Minister Lee Chee Leong, the unsold units were estimated to be worth RM12.26 billion with condominiums and apartments costing over RM500,000 dominating the category of unsold homes in Malaysia.
And these shocking figures only paint part of a tragic picture as property market expert Ernest Cheong details that the hefty RM12.26 billion valuation is only inclusive of the primary market of brand new residential units and not the secondary market of second hand properties which he estimates to be around RM4 billion.
“So, about RM16 billion worth of properties are waiting for buyers. But there is no demand. The reason is that people don’t have the money”, he said in a report by local media outlet Free Malaysia Today.
Similarly, Bank Negara Malaysia’s (BNM) view on the property sector was also unfavourable as they cited in a report that they believed the sector was plagued with an overabundance of unaffordable properties.
“Currently, the property market is characterised by an oversupply of non-affordable housing, idle commercial space and conversely, an undersupply of affordable homes,” it said in a report on the housing market.
The unaffordability of properties, a reoccurring theme of the local property market, had at one point contributed to our national household debt to soar to a record high of 89.1 per cent in 2015 whereby 56.2 per cent were due to loans to buy real estate for residential and non-residential purposes.
The peak caused the central bank to tighten their lending policies even further and while household debt was able to ease to 88.4 per cent in 2016 with bad debts from residential properties staying stable at 1.1 per cent throughout 2014 to 2016, BNM has continued on with their stricter proven income lending policies and disallowing income projection of growth.
Due to the stricter lending policies and continued high cost of properties, some analysts like Cheong have been vocal that a possible property crash may occur in 2018 as developers slash their prices to rid themselves of unsold units.
However, with Malaysia’s GDP forecasted to grow at a healthy 5 to 5.5 per cent in 2018 alongside rising petrol prices and stable low unemployment rates, a good number of property experts are instead optimistic that our property market will instead see some recovery in 2018.
Speaking on the matter, Sarawak Housing and Real Estate Developers’ Association (Sheda) Kuching Branch advisor, Sim Kiang Chiok opined that for Sarawak’s property market at least, we would likely witness the property sector starting to climb in 2018 from its lowest point in 2017.
“We are aware that there is a mismatch of supply and demand in the local property market as developers had been building properties larger than what the market can currently afford – leaving us with a current over-supply of higher priced houses.
“However, this does not mean that there is low demand for housing as housing is still a basic human need and demand for it will always be there as long as there is population growth, full employment rates, rural urban migration, and robust economic growth,” he said.
In Sarawak, properties have steadily appreciated over the decades and while their demand has waned in recent times, Sim pointed out that the dampening demand was only affecting properties above RM450,000 while demand for single storey terraces and small apartments below RM350,000 is stronger than ever.
And local developers seem to be picking up on this as Sim recounts that Sheda Kuching Branch’s most recent road show had seen many of its members starting to sell apartments below RM 350,000 and single-storey terrace houses starting from RM210,000.
“These are good signs that local developers are starting to build in accordance to the demand of the market and the strict lending policies of the banks.
“So in 2018, we can expect that the property market to be a buzz with high demand of properties under RM350,000 that are well accessible and located in secondary areas.
And besides that, Sim adds that the 50 per cent rental income exemption from residential properties not exceeding RM2,000 per month as outlined in Budget 2018 would also be an added incentive to drive demand in the property market.
“By allowing property owners to generate better returns with lower income tax, the tax exemption would help promote house ownership as an investment and also encourage present house-owners to hold onto their present investment properties,” he said.
Agreeing with Sim on the possibility of a recovering property sector in 2018, AmInvestment Bank Bhd
While both Sim’s and Cheong’s opinions are on opposite ends of the spectrum, AmInvestment Bank Bhd (AmInvestment Bank) believes that both arguments have their merits and are instead taking a more balanced stance to the sector.
AmInvestment Bank is opining that signs of recovery observed in 2017 such as the shifting of focus into affordable housing and the willingness of developers to reduce their prices will carry on into 2018 – breathing some life back into the languished sector.
“We do not expect a full-fledged recovery of the sector within the next 12 months, as various key challenges remain,” said the bank in a sector report.
However, the bank was less optimistic on the sustainability of developers switching their focus to affordable housing as the segment typically commands lower margins that could be further strained as competition intensifies in the property sector.
“We believe the investment case for an affordable housing developer only holds water if the developer is able to sell affordable houses in large quantities, has access to highly cost-effective and speedy construction methods, and most importantly, has the ability to secure strategic landbank with a high plot ratio at cheap prices.
“Otherwise, we are more inclined to see selling affordable housing as a means for developers in general to tide themselves over while waiting for the property market to turn around,” said AmInvestment Bank.