Budget 2013 Expectations - People Friendly but Market Neutral

While we agree that the forthcoming budget could be people‐friendly, we reckon that it could be fairly neutral to the market unless we see (i) a stronger‐than‐expected fiscal deficit position, (ii) a reduction in corporate income tax or (iii) an abolishment of the windfall tax for planters, which could then be more positive for the market. Even if our Budget wish list materialise, the impact is expected to be more sector‐centric or stock‐focus only. Despite the flat expectation over the forthcoming budget and GE uncertainties, we continue to advocate “Buy‐on‐Weakness” as our preferred investment strategy with a 12‐month Index Target at 1,750.

Another round of people‐friendly budgets. As the 13^th General Election (GE) is around the corner, it is widely anticipated that the upcoming budget, which will be tabled by Prime Minister Datuk Seri Najib Razak in Parliament on 28 September 2012, could be a “feel good” budget filled with goodies for the people. A people‐friendly budget could also translate into better consumer sentiments and hence private consumption. Generally speaking, this should benefit the consumer sector (see overleaf for details).   

Is the fiscal deficit a concern? Nonetheless, as perceived by most market participants, this budget could be the last‐ditch effort to win the hearts and minds of the people of Malaysia before the GE. As such, this raises the concern over the potential budget/fiscal deficit. In fact, a foreign credit‐rating agency had indicated its intention to downgrade Malaysian sovereign rating earlier should it see lesser commitment by the Government to improve the current fiscal deficit position. Under such circumstances, this could put pressure on the ringgit against other regional currencies (note that the ringgit could still strengthen against US dollar as US has recently embarked on another round of Quantitative Easing Programme). As such, we believe the Government will manage the country’s fiscal share via efforts to cap operating spending via the Government Transformation Programme (GTP) and savings from on‐going subsidy rationalizations, to cut development expenditure by promoting private investment via Economic Transformation Programme (“ETP”), a more effective tax collection as well as a more prudent debt management. Collectively, we believe this may ease Malaysia’s fiscal strain going forward. We project the fiscal deficit to improve to approximately 4.3% of GDP in 2013 from an estimated 4.9% (the government targets 4.7%) in 2012. In the efforts to step up the implementation of ETP, these should see better prospects for the Construction as well as Oil & Gas sectors.

Any expectations in respect to the change in the tax regime? We do not any expect any significant hikes in taxes ahead of the GE, including sin taxes. Should this expectation materialise, we believe that there will likely be some run‐ups in tobacco, brewery and gaming stocks. Green cars are expected to continue to enjoy a favourable tax treatment hence this may benefit Honda (directly) or DRBHCOM (Not Rated) indirectly, as they are ones that are the most aggressive in this segment relatively to other players. While we are hopeful that the government may reduce corporate and personal income taxes, we believe this probability is low, especially in the absence of the Goods & Services Tax (GST) implementation. Furthermore, due to the GE factor, we also reckon that the topic of GST will not be raised in the forthcoming budget. However, due to Indonesia's corporate‐friendly CPO tax structure and the effort to promote Palm Oil industry as per the ETP, we reckon that the government should relook at the windfall tax imposed on the upstream CPO players. In fact, we foresee a favourable share price response for all planters should this tax issue be addressed. However, in the constant efforts to curb property speculations, there is a high likelihood that the Real Capital Gain Tax (RPGT) will be raised, especially on the higher‐end property segment. However, for the affordable housing segment, we are likely to see more favourable tax incentives i.e. a waiver of stamp duty or tax deduction for mortgage installment interest against personal taxable income. As such, we prefer developers that have meaningful/significant earnings contributions from the affordable housing segment i.e. HUAYANG (Not Rated), IJMLAND and UOADEV (OP, TP: RM2.30).  

Source: Kenanga