Budget 2010 seen as market neutral

KUALA LUMPUR: Stock picking will be the order of the day in the next few trading days as investors seek to digest the implications of Budget 2010 which was announced last Friday as well as attempt to determine the beneficiaries of the government’s proposals, or otherwise.

While some sectors including the insurance, Islamic banking, automotive and broadband telecommunications industries are deemed beneficiaries, some analysts see the impact of the budget as neutral to the overall market.

This is because the government is still operating on a deficit budget and there appears to be a lack of multiplier effects on corporate earnings.

Some argue that the measures announced are not radical enough to spur the creation of any new economic model in the short to medium term and do not clearly show how a high-income society could be formed.

Worth noting is the government’s effort to curb the rising budget deficit following multi-billion ringgit worth of fiscal injections to sustain the country’s economic fortunes. At the same time, key takeaways from the budget include the reduction in personal income tax for the top bracket taxpayers and initiatives to further boost the local stock market.

HwangDBS Investment Management Bhd head of equities Gan Eng Peng said while there were specific measures which could drive individual stocks, the budget as a whole was not expected to drive the overall market, either positively or negatively.

“We must take into context that the government is operating on a deficit budget and hence has limited room to stimulate the economy.

“Whatever tax cuts and other government revenue reduction measures must be supplemented by higher taxes and collection elsewhere. Hence, the net effect is neutral,” Gan said in an emailed statement.

The government has earmarked RM191.5 billion under the latest budget, an 11.2% reduction from the revised allocation of RM215.7 billion under Budget 2009. This is the first time in 23 years that the national budget allocation is reduced, according to Khazanah Nasional Bhd.

Of the RM191.5 billion for Budget 2010, 72.2% or RM138.3 billion has been set aside for operating expenditure, while RM53.2 billion has been earmarked for the development portion.
The federal government’s revenue for 2010 is expected to be 8.4% lower at RM148.4 billion compared with the projected RM162.1 billion this year. The estimated revenue and expenditure are expected to translate into a lower budget deficit of 5.6% of gross domestic product compared with 7.4% in 2009.

The government says Budget 2010 will serve as a platform for the development of a new economic model and formulation of the 10th Malaysia Plan. The budget will focus on the private sector as the driver of economic growth, developing skilled workers and boosting the public sector’s efficiency.

AmResearch said: “From an equity market perspective, Budget 2010 is again a non-event, given lack of multiplier effects on corporate earnings near term and muted consensus expectations on potential catalytic policy pronouncements.”

RHB Research Institute head of research Lim Chee Sing is more optimistic. He said the latest budget was a balanced scheme and there could be a slight positive impact on the local stock market given that market expectations of the budget were low.

“There is fiscal discipline to bring up the comfort level that the government’s fiscal deficit will be reduced,” Lim told The Edge Financial Daily over telephone.

Meanwhile, the risk of a selldown in local stocks is not at all impossible, as Bank Islam Malaysia Bhd chief economist Azrul Azwar puts it.

The fact that the local equities barometer had recorded gains prior to the announcement of the budget has fuelled fear of profit-taking activities today.

“Normally, the market will pare gains it had made on budget day. On Monday, the stockmarket could either trade sideways or be in the red,” Azrul said.

The impact of the budget on the man in the street is worth noting. According to Azrul, the reduction in personal income tax could be a prelude to the implementation of the goods and services tax.

Azrul said the retail sector would benefit from the reduction in personal income tax and the government’s move to raise the man in the street’s quality of life.

However, the positive impact may be offset by the imposition of the RM50 per annum service tax on each principal card and RM25 per supplementary card, but this encourages prudence in personal finance.

“One of the ways for people to have higher income is to introduce a minimum wage policy. But it is absent in the budget,” Azrul said.

Meanwhile, HwangDBS’s Gan said the imposition of the 5% real property gains tax (RPGT) would be mildly negative for property speculators.

“We expect some short-term knee-jerk reaction to this but it should not severely affect the positive sentiment on the property market. We think underlying liquidity driving the property market and the lack of large price increases will cushion the fall,” Gan said.

On the banking sector, OSK Research head of research Chris Eng expects CIMB Group Holdings Bhd and MALAYAN BANKING BHD [] (Maybank) to be the major beneficiaries of the government’s initiative for the Islamic banking sector.

“Those that benefit most from these initiatives are likely to be CIMB and Maybank, which have strong presence in Islamic banking,” he said.

RHB Research Institute said the near-term positive measures appeared to be mostly focused on raising personal disposable incomes, both for the high- and low-income groups, with a one percentage point cut in the maximum income tax rate from 27% to 26%, the increase in personal tax reliefs, and special one-off RM500 payment to lower-level civil servants in December 2009.

It said those measures would clearly benefit the consumer sector and in particular companies like HAI-O ENTERPRISE BHD [] (fair value: RM8.80; Friday’s close: RM7.05), AEON Co (M) Bhd (FV: RM5; Friday’s close RM5.15) and PARKSON HOLDINGS BHD [] (FV: RM5.60; Friday’s close RM5.13) within the multi-level marketing and retail subsectors.

RHB Research also said the implication was a gradual appreciation of the ringgit that was likely to be positive for the equity and debt markets as it encouraged greater foreign participation in an environment of low foreign non-strategic ownership in the equity market (estimated to be below 22% currently).

It said the proposals for the telecommunications sector would be positive for both fixed and wireless broadband operators including TELEKOM MALAYSIA BHD [] (FV: RM3.55; Friday’s close RM3.04), Axiata (FV: RM2.75, Friday’s close RM3) and DIGI.COM BHD [] (FV: RM21.90; Friday’s close RM21.6).

RHB Research said on the negative side, the equity market may still be disappointed by the lower allocation for infrastructure projects, and in particular the lack of mention of the LRT extension project.

It said this could dampen sentiment towards major CONSTRUCTION [] companies like GAMUDA BHD [] (FV: RM2.18; Friday’s close RM3.34) and IJM Corp (FV: RM3.94; Friday’s close RM4.93) as well as building materials companies including YTL CEMENT BHD [] (FV: RM4.26, Friday’s close RM4.20) and Lafarge (FV: RM5.52, Friday’s close RM6.20).

RHB Research said likewise, sentiment towards property companies may also be dampened by the 5% RPGT imposed on property disposals. “In the near term, therefore, we may see some pullback in the construction, property and building materials sectors,” it said.

The research house said based on its current earnings projection, the FBM KLCI was already trading at 16 times 2010 earnings and 2.1 times price-to-book value, representing one time PER premium to the average PER over the last seven years from 2002 to 2008.

“Though still not stretched, valuations are by no means cheap and are back to normal levels. Nevertheless, the market tends to trade at a premium at the early stage of an economic upcycle (one to two times PER premium) and has a tendency to overshoot on the upside for an extended period.

“This implies that the FBM KLCI could potentially trade up to 17 times 2010 earnings or 1,345 given high liquidity, low interest rates and the trend of a weakening US dollar. If this materialises, it would mean that the FBM KLCI is likely to be relatively flat for 2010,” it said.