May 9, 2018 marked a significant moment for Malaysia. After a whirlwind election that dragged into the early hours of the next day, many Malaysians retired to bed with one thought in mind: It was the end of a 60 year rule for Barisan Nasional and the start of a new beginning.
This momentous occasion spelled a lot of uncertainties as the changing government brings questions on policies and rules that may no longer apply moving forward.
While many rejoiced over the country’s historical moment, there was still a real worry lurking: how will markets and investors react to this?
After a four day long weekend, Bursa Malaysia’s first trading day since General Election 2014 (GE14) saw a wild reaction from the market as Bursa recorded its highest ever daily trading value of RM7.30 billion but ended the day with net outflow of RM682.6 million as foreign investors began a heavy sell-down.
The sell-down continue into Tuesday as it swelled to minus RM837.3 million – the largest daily outflow since early February 2018.
However on Wednesday, the sell-down started tapering down to minus RM320.7 million as investors’ confidence in the market began returning thanks to post GE14 reforms from the new government which included zerorising the Goods and Services Tax (GST) beginning June 1 onwards and pardon granted to jailed former Deputy PM Datuk Seri Anwar Ibrahim.
“The FBM KLCI followed suit to settle 0.54 per cent higher at an eight-day trading high of 1,858 points as buying activity by retailers and local funds continued amid renewed optimism,” said the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) in a fund flow report.
Unfortunately, that wave of optimism was dampened the very next day as foreign investors continued their sell-down on Thursday and Friday to a tune of minus RM384.4 and minus RM251.2 million as the surge in US treasury yield during the week crept into the minds of investors.
The trading week ended with foreign investors dumping a total of RM2.48 billion of local equities into the open market – leaving us with the heaviest weekly foreign sell down the country has seen since the trading week August 19 to 23 in 2013 which saw a net outflow of RM2.90 billion.
Foreign investors still participating strongly
Because of this intense selling pressure, MIDF Research guides that the cumulative net inflow into the country so far this year has been substantially reduced to RM40.2 million from RM2.52 billion before GE14.
Despite this downbeat development, MIDF Research believed that Malaysia still remains a major beneficiary of foreign inflows as its foreign participation remained strong as foreign average daily trade value (ADTV) soared by almost 100 per cent to RM2.39 billion – the highest in 24 weeks.
Similarly, participation in the retail and institutional market was observed to be robust as their ADTVs reached a level not seen in the last 18 weeks.
“We are cautiously optimistic that this cumulative figure may gradually pick up as more political clarity comes into picture,” said the research arm.
While it was widely expected that the sell-down would taper down the next week, it instead continued with full force as investors were spooked by bad sentiment on our national debt, our ability to service it in the absence of the GST and continued coverage of our 1MDB wealth fund corruption scandals.
During a press conference on Monday, May 21, Tun Dr Mahathir announced that our national debt has surpassed RM1 trillion and that important measures would be taken for the nation to quickly recover from the situation.
The actual figure of our nation debt was clarified to be RM1.087 trillion by Finance Minister Lim Guang Eng in a statement on Thursday (May 24) and is around 45 per cent higher than previously reported.
The shock announcement coupled with our credit negative concerns about the GST removal and other global headwinds such as US President Donald Trump’s vocal displeasure over trade negotiations with China and the cancellation of North Korean summits ended up exacerbating the sell-down in our local equities market even more.
The combined headwinds ended up causing the FBM KLCI to witness its largest one-day decline in over two years on May 23 (Wednesday) , falling 2.2 per cent or 40.78 points at 1,804.25 with RM31.7 billion flowing out of the market in a single trading day with 763 decliners and 237 gainers.
The next day (May 24), the sell down eased slightly to minus 28.59 points of 1.58 per cent but caused the market to tumble to sub 1,800 levels at a 1775.66 point closing.
And finally on Friday, Bursa Malaysia snapped three days of losses to close higher on renewed buying interest as the over-reaction to the national debt level eases. The benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) closed at 1,797.40, up 21.74 points from Thursday’s close of 1,775.66.
As of May 25, foreign investors have been net sellers for 15 straight days.
Tax regime change: Who are the biggest winners?
One of Pakatan Harapan’s bigger promises in their election manifesto is the abolishment of the GST and true to their word, the new government began putting in motion steps to remove it.
On May 16, the Ministry of Finance (MoF) released a statement indicating that the 6 per cent GST would become zero-rated on June 1.
The announcement caused much buzz in the market as many analysts were already debating the pros and cons of the GST prior to the polls. The main con of the GST’s do-away is that the government is expected to lose a revenue of RM17.95 billion.
In response to that, newly-minted Finance Minister Lim Guan Eng has been vocal that he believed the loss of revenue would be made up from the increased economic activity brought about from the GST abolishment.
On this point, the research arm of CIMB Investment Bank Bhd (CIMB Research) guided in its economic report that there would be a chance that the GST slash might even boost overall government revenue as revenue from corporate and other taxes would increase as economic consumption increases.
But for all of this to happen, BNM’s governor Tan Sri Muhammad Ibrahim has issued a statement saying that it was important for relevant authorities to ensure that businesses are actually passing the benefit to the public at large and encouraging consumption.
While it would great to imagine a world without taxes, the reality is that the shortfall from our GST will still need to be addressed and to that, the MoF has announced in a separate statement that a fiscal reform initiate is already underway and that the shortfall from the GST will be cushioned by specific revenue and expenditure measures that will be announce in due course.
“The Sales and Services Tax (SST) will be re-introduced. Expenditure reduction will begin with rationalisation, efficiency measures and reduction in wastages.
“Of significance, oil prices have been higher than the US$52 per barrel estimated for Budget 2018. This provides fiscal buffers for the immediate future. Fiscal responsibility, transparency and governance will be a paramount consideration in rolling-out the fiscal reform,” said the MOF.
While no further official details have been announced on when the SST will be re-implemented, BMI Research, Fitch Group’s research arm reckons that the re-implementation would take place sometime in 2019 – causing the federal government at least seven months of lost GST revenue.
Because of this, BMI Research has widened its forecast for Malaysia’s fiscal deficient to 4.0 per cent of our GDP in 2018 and 3.1 per cent of GDP between 2018 and 2027. Previously, their forecasts for both figures were 2.8 per cent.
“Even if the SST is brought back as announced by the Dr Mahathir administration, and assuming that revenue collection under it remains the same as it was before the replacement by the GST in the second quarter of 2015, the fiscal deficit will likely widen over the next decade,” said the research arm.
On the other hand, Tun Daim Zainuddin who is the chairman of the newly formed Council of Eminent Persons (CEP) that acts as an advisory board for the federal government has alluded in a recent press conference that the SST will be coming back in 3 months’ time and is expected to help generate around RM30 billion in revenue for the government.
Though this figure is still lower than the GST collection of RM43.8 billion forecasted in 2018.
Positive impacts of GST-free period
With less than a week before our GST is official zerorised, the market reaction so far has been widely positive on increased consumption as Malaysians start reviewing their wish lists.
According to Affin Hwang Investment Bank Bhd (Affin Hwang Capital), one of the most anticipated sectors to benefit from this is the automotive sector as consumers are expected to rake in savings ranging from upwards of RM4,000 to RM70,000.
The significant savings is expected to cause the automotive sector to experience a temporary boost as buyers clamour to take advantage of the prices amidst the attractive Hari Raya promotions.
“With the newly-revised zero-rated GST and the absence of SST for now, our channel checks indicate that auto players are adopting a variety of pricing strategies although predominantly pointing towards lower prices, which in our view may bring forward the replacement cycle.
“Thus far, Tan Chong who has distribution rights of Nissan, DRB-Hicom which has Subaru and Proton, and Perodua have responded by offering ‘price protection scheme’, offering refunds/ service vouchers to cover the car price fluctuation, ahead of the impending SST.
“Others, like UMW who has like MINI, Honda, Toyota, and Volvo are cutting prices, excluding the additional 6 per cent GST charge. The new development alongside with the ongoing Hari Raya promotions from automakers, is likely to excite buyers to flock into showrooms again, leading to a temporary total industry volume boost,” said the research arm.
Similarly, most consumer sectors are all expected to see a temporary boost. In the gaming sector, the 0 per cent GST will bode well for number forecasting operators (NFO) as consumers have been absorbing the 6 per cent tax since the implementation in April 2015.
And for companies that have been absorbing the GST costs, they are expected to pass on the savings to their consumers. One industry that has been vocal about this is our tobacco industry who have guided that they will do so and expect to see a spike in sales.
While the tobacco sector is still plagued by the strong presence illicit market alternatives, HL Invest reckons that this situation will improve as PH’s has been vocal about its intention to collect RM6.1 billion in cigarette excise duty – a boost from the RM3.5 billion estimated by the previous government.
“We expect the new government to step up efforts to eliminate illicit cigarette trade, in turn boosting legal market volumes, and hence increasing excise duty tax collection in order to fill the loss of income from zerorising GST,” said HL Invest.
What happens after SST returns?
So far it is pretty clear that most if not all market sectors will stand to benefit from our upcoming GST-free period. However, like all holidays, it has to come to an end at some point.
As previously mentioned, the MOF has already announced plans to reintroduce the SST at a later date along with other reformative actions.
When it does return, most analysts have guided that they expect the market to experience a few hiccups from the tax migration like slightly reversed price drops but nothing too unmanageable.
However one sector that might have uncertainties on the return of the SST would be the telecommunications (telco) sector as it is unclear who will be footing the bill of the SST in its prepaid segment.
According to AffinHwang Capital, prior to the introduction of the GST, both post and pre-paid sales were subjected to a 6 per cent service tax which the telco passed onto their post-paid customers but absorbed for their pre-paid.
Upon introduction of the GST in 2015, telco players ended up deciding to pass on the burden of the GST to both their customer segments which ensued a public outcry that ended with some telcos deciding to provide free minutes and text messages to their customers for a limited period.
The government at the time, later introduced a new mechanism where consumers received a rebate for the GST paid on prepaid services.
Because of the telco sector’s complicated history with the GST, the effect of the SST on it is uncertain as it is unclear what the new SST tax rate will be, whether post and pre-paid sales are subjected to the SST and whether the rebate will be continued.
Should the rebate be continued, the impact of the SST to telcos will be neutral but if not, then the SST will end up causing a rather negative impact to the sector as major players all have significant exposure to the pre-paid segment.
Currently, DiGi has the highest exposure to Malaysia’s prepaid segment, making up 59 per cent of its 2017 revenue, followed by Maxis with 44 per cent and Axiata with 11 per cent.
Despite this, AffinHwang Capital opined that the situation is still not too dire due to the strong fundamentals of the sector.
“Notwithstanding DiGi and Maxis’ high revenue exposure, we expect the direct earnings impact from SST to be manageable, taking into consideration their high profit margins; resilient earnings trend during the GST implementation period; and we expect the telcos to benefit indirectly from improvement in consumer sentiment arising from lower GST rate.
“We maintain our neutral neutral stance on the cellular space as it remains competitive while valuations look rich; the yields of 3.5 to 4.4 per cent should however cushion downside to share prices,” said AffinHwang Capital.
Optimism in the distance
Despite the dire picture that our local bourse is currently seeing, all analysts have anticipated some level of foreign attrition in the short-term due the lack of political clarity arising from a brand new government.
The country’s sell-down might likely continue for a while but it is still too early to predict how our markets will fare in the medium to long-term without out more information and details on how the government will address policies and strategies to improve business and consumer sentiment, and their strategies on how to fix Malaysia’s fiscal deficit position.
However, one thing for certain is that continued successes by our new government in keep its election promises and governance will help safeguard our sovereign credit ratings and slowly but surely improve foreign investor’s perception of Malaysia while attracting them back onto Malaysian shores.
Currently, our sovereign ratings are still stable and unchanged nwith Standard and Poor’s credit rating standing at A- with a stable outlook, Fitch’s at A- with a stable outlook and Moody’s credit rating at A3 with a stable outlook.
Malaysia’s GDP outlooks are also looking intact as both MIDF Research and AmBank forecasted Malaysia’s 2018 GDP growth to be sustained at 5.5 per cent with private consumption and services sectors continuing to support economic growth together with other areas of business activities.
Similarly, Bank Negara Malaysia also believes that the local economy is expected to remain on a favourable growth path for the remainder of the year, with domestic demand driving growth.
Meanwhile, Kenanga Research revised its 2018 GDP growth forecasts slightly downwards to 5.1 from 5.5 per cent as they expect political uncertainties from a change in government to deter private investments.
And for the ringgit’s outlook, analysts all-round have maintained a rather optimistic outlook that the local currency will continue strengthening against the US dollar from our current level of 3.98 ringgit per US dollar.
Leading the way with unchanged optimism, both the research arms of CIMB Investment Bank Bhd (CIMB Research) and Maybank Investment Bank Bhd (Maybank IB Research) has maintained their respective forecasts for the ringgit post-GE14 for now.
CIMB Research believed the ringgit will end up strengthening to 3.75 per dollar by the end of September thanks to the rising oil prices boosting the economy.
Similarly, Maybank IB Research maintained its forecast for the ringgit against the US dollar this year at 3.85, 3.70 and 3.65 per dollar for the second, third and fourth quarter of 2018 respectively.
“Current level of ringgit remains fundamentally undervalued relative to our updated fair value estimates of 3.56 for US dollar/ringgit. We expect this misalignment to correct further in the longer term,” said the research house in a post-GE14 report.
On the other hand, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) and Kenanga Investment Bank Bhd (Kenanga Research) are both taking a more cautious stance in the short-term due to the dip knee-jerk reaction from GE14 that we are current undergoing right now but improving long-term estimates.
MIDF Research forecasted the US dollar-ringgit rate may get pushed to RM4.03 in the near-term but end up strengthening to RM3.95 at the year-end provided that we see sound economic fundamentals, elevated and stable commodities prices and strong external demand to support the ringgit.
Finally, Kenanga Research who is also taking a more cautious approach predicts that the US dollar-ringgit will be increasingly volatile with a bias on weakness and trading would be range bound between RM3.85 and RM4.10 in the next three to six months before stabilising and ending the year at 3.90 ringgit per dollar.