Factors driving performance
Resilient performer. In November, the benchmark KLCI ended flat, outperforming neighbouring markets weighed down by market specific issues (politics in Thailand, current account outlook in Indonesia). The KLCI was relatively more resilient compared to the MSCI APxJ’s 1.7% fall and managed to shake off post-budget blues that hit sectors such as property (Higher Real Property Gains Tax, removal of the Developer Interest Bearing Schemes) and an uninspiring results season (2013 earnings growth tweaked to 5.8% from 7.5%; 2014: unchanged at 9.7%). YTD the KLCI is up 7.0% versus the MSCI APxJ’s 1.4% gain.
Year-end cheer.December is typically a rewarding month, with the KLCI trending up in 23 of the past 26 years. This includes an uninterrupted winning streak over the last eight years. This might be attributed to window dressing activity on book-closing days. The one-month period (up till end-Dec) has provided the largest average return of 4.8% since 1987 and the highest probability (88%) of registering a positive return over the past 26 years. Since 2008, the average monthly return has been 2.7%. Index components that we are keen on include Maybank, Tenaga, IOI Corp, Hong Leong Bank, Hong Leong Financial Group and SapuraKencana Petroleum.
Measures to improve fiscal deficit.To improve the fiscal deficit position, the Government intends to reduce subsidies in 2014, and projects subsidies to drop 16% (or RM7.3bn) from RM46.7bn in 2013. Subsidy for sugar (RM0.34/kg) has been removed. The reduction in overall subsidies is equivalent to2.2x the full-year savings from the lower fuel (RON95) subsidy (20 sen or RM3.3bn) in September.
Potentially weaker consumer spending. The lower subsidies will be implemented together with targeted cash assistance, but it could still weaken consumer spending and adversely affect Parkson (Fully Valued) and Padini (Hold). Although not stated in the Budget, the subsidy rationalisation is likely to involve energy prices; a fuelcost pass-through mechanism would be positive for Tenaga (Buy). In addition, the Government will introduce the Goods and Services Tax (GST) in 2015 (at 6%) to widen its tax base. Bursa Malaysia (Buy) could be a beneficiary if GST replaces stamp duty for share trading.
Selected construction projects to proceed.The 2014 Budget highlighted that the construction of the West Coast Expressway (WCE) will proceed, allaying worries that it would be delayed. The next milestone is the announcement of achieving financial close. The commitment for WCE is certainly positive for IJM Corp (Buy). We look for IJM to clinch c.RM3-4bn out of the RM5bn worth of infrastructure works. The Gemas-Johor Baru double tracking or southern double tracking will also continue. This is positive for Gamuda (Buy). WCT (Buy) could benefit from the upgrading of East Malaysian airports.
Top Picks for the month
Bursa Malaysia (Buy; Share price: RM8.05, TP: RM10.10)
Potential for structural changes in fees and costs.
Implementation of GST could be an opportunity to spur retail
Tenaga (Buy; Share price: RM9.86, TP: RM11.40)
Rising power demand, low coal prices, and implementation of
regulated return are key catalysts.
Hong Leong Financial Group (Buy; Share price: RM15.82, TP: RM18.80)
Strong momentum in insurance business and resilient earnings
from bank operations.
Axiata (Fully Valued, Share price: RM6.72: TP: RM5.70)
Margin compression at XL Axiata.
Maxis (Fully Valued, Share price: RM7.03, TP: RM5.60)
Trading at highest PE in the sector. Market share may
moderate with intensifying competition.
MAS(Fully Valued, Share price: RM0.32, TP: RM0.28)
Yields under pressure due to competition from regional and