As we enter the new year, 2020 offers a promising start to a new decade for most economies worldwide.
Economists generally opine that while 2020 still offers risks brought on by disruptive events from previous years, the impact of these events could be less significant with tensions and monetary policy simultaneously easing.
“For 2020, the synchronous easing of trade tensions and monetary policy will be a key theme. Though uncertainties over trade still linger, the current sentiment is positive,” Morgan Stanley’s chief economist Chetan Ahya said in Morgan Stanley’s research statement on global markets in 2020.
“While this global cycle has lasted more than a decade, constant interruptions have thus far averted an exuberant stage that would threaten overheating,” Ahya commented.
Those disruptions included the European debt crisis in 2011, China’s slowdown in 2014 and, most recently, trade tensions.
“Now, with trade tensions and monetary policy easing concurrently, we think the macroeconomy can continue to make forward progress,” Ahya added.
S&P Global Ratings separately believed that the global macroeconomic narrative has improved and steadied compared with the condition seen in 2018.
It also highlighted a recede in the threat of a sharp downturn across Asia-Pacific over the past quarter.
Nevertheless, it still pointed out that the region could still continue to be plagued by uncertainties.
“Although that’s a fact of life, uncertainty about the economic outlook has appeared higher than normal recently. A volatile mix of populism, trade and technology tension, and geopolitical realignments make it harder to envisage what the future global economy will look like,” it said.
For Malaysia, analysts believe that while the country’s economy is still affected by macro uncertainties, its domestic growth is expected to continue to keep its economy buoyed for the year.
In its Economic Outlook for 2020, the Ministry of Finance Malaysia expected Malaysia’s economy to remain steady with a growth of 4.8 per cent led by domestic demand.
“Private sector expenditure will remain the key driver of growth with private consumption and investment rising 6.9 per cent and 2.1 per cent, respectively.
“Meanwhile, public sector expenditure is forecast to rebound, following improvement in investment.
“On the supply side, the expansion is expected to be broad-based, with all sectors registering positive growth,” it said.
Nevertheless, it cautioned that external uncertainties remain downside risks to Malaysia’s growth prospects.
“To minimise the risks and drive the economy, the government will implement measures to harness economic opportunities, level up human capital, ensure inclusivity and revitalise public institutions and public finances.
“This will lay the foundation for the crystallisation of the objectives of (the) Shared Prosperity Vision 2030 and for Malaysia to reemerge as an Asian Tiger,” it said.
With that, BizHive Weekly takes a look at analysts’ take on the year ahead and strategies as well as policies that are being put in place to ensure Malaysia’s economy remains stable.
Rise of Malaysian equities in 2020
Following the shocking general elections in 2018 which affected Malaysia’s markets, its ripple effects are slowly easing as Malaysian equities’ performance are expected to strengthen as domestic uncertainties clear up.
In a report, the research team at Kenanga Investment Bank Bhd (Kenanga Research) believed that Malaysian equities are set for a better year in 2020 with the resumption of earnings growth after a two-year hiatus.
This growth is expected to be steered by subsiding external risks, recovering commodity, the anticipated revival of mega infrastructure projects, and the positive impact of trade diversion on investments and exports.
“The recently concluded third quarter of 2019 (3Q19) corporate results point to the arrest of earnings decline with a turnaround in subsequent quarters starting to show.
“Having fallen five per cent since the start of the year, the valuation for the FBM KLCI looks appealing now trading as it is on a 12-month forward price earnings of 15.7-folds which is below both the five-year and seven-year averages,” Kenanga Research commented.
Commenting on the full-year performance in 2019, RHB Investment Bank Bhd regional equity research head Alexander Chia was quoted by Bernama as saying it had all to do with corporate earnings’ growth and valuations, wherein corporate earnings have been dismal in recent years.
“For the 30 FBM KLCI component stocks, we projected a 6.3 per cent earnings per share contraction for the whole of 2019 before moving to a 4.4 per cent growth in 2020, while forward market price-to-earnings ratio stands at about 17 times.
“However, the 2020 estimate carries downside risks given that we are moving into a slower growth environment globally and domestically,” he said.
The ringgit, which lacked strong consensus view on its strength, was also a dampener for foreign funds and made them resolutely underweight on Malaysian equities, he added.
“This reflects structural macroeconomic issues which will take time to resolve, in addition to the FTSE Russell’s decision to keep Malaysia on the watch list for continued inclusion in the World Government Bond Index until the next review in March 2020,” he told Bernama.
For 2020, analysts generally pegged the FBM KLCI to reach between 1,680 to 1,712 points.
In its market outlook, MIDF Amanah Investment Bank Bhd (MIDF Research), which placed its FBM KLCI target at 1,680 for 2020, pointed out that recent developments on the geopolitical scene point to a challenging outlook for the capital market in the near future, and it expected these to continue to cast a shadow on investors’ sentiment on our equity market.
“Hence, we have our 2020 FBM KLCI target at 1,680 points, at an implied lower end of its historical range price earnings ratio (PER) of 16.5-folds,” it said.
It noted that the FBM KLCI for 2019 year to date has been mostly affected by declines in index heavyweights from the finance (banking) and industrial production sectors whose indices fell 12 and 9.9 per cent respectively.
“While the energy sector has so far returned 45.8 per cent gain this year, its two components –Petronas Chemicals and Petronas Gas – have been the two other laggards in the index.
“And conversely, the sector has seen MISC and Dialog as the leading gainer in FBM KLCI, seeing gains of 29.6 per cent and 12.2 per cent respectively, impacted by recent higher crude oil prices. They are followed by the telco sector components; Axiata, Digi with gains of 9.6 per cent and 4.9 per cent respectively,” it explained.
“While our official 2020 year-end target for the FBM KLCI is based on the baseline scenario above, we cannot ignore the possibility of a ‘tail’ scenario transpiring. If the ‘tail’ scenario were to happen, we may see material valuation expansion which would catapult the FBM KLCI towards the higher end of its historical PER range.
“Under the ‘tail’ scenario, at one standard deviation (SD) and PER of 18.4-folds, the FBM KLCI may conceivably rise to 1,900 points (which equates to its all-time high level) in 2020.
“Admittedly, the US dollar is still very much the world’s reserve currency and the foremost source of crossborder funding for both economic as well as financial activities worldwide.
“This reality can be glanced through the highly correlative relationship between the US monetary base and the Asian currencies (as represented by the ADXY index).
“As the US Fed carries on with its dovish monetary stance, we can expect to see continued expansion of its balance sheet. In this regard, we foresee the fledgling expansion of US monetary base to continue into 2020.
“Consequent to the continued expansion of US monetary base, it is not inconceivable to anticipate rising flow of (both economic and financial) funds eastward with positive impact on the performance of Asian currencies,” it pointed out.
However, it also highlighted that in the ‘tail’ scenario, the movement of funds eastward may help to underpin investors’ sentiment over the prospects of liquidity-induced macro reflation in East Asia.
On this score, the so-called economic ‘green-shoots’ are all needed to convince some investors that they are actually seeing light at the end of the tunnel.
“As the rising US monetary base correlates with strengthening Asian currencies (arguably due to rising flow of funds eastward), we reckon the value of the Malaysian ringgit would likewise be reinforced.
“In this regard, the FBM KLCI should similarly be bolstered as its performance, at least in the shorter-term, is correlated to the movements of Malaysian ringgit against US dollar,” it added.
On the other hand, the research team at AmInvestment Bank Bhd (AmInvestment) believed that Malaysia’s market will do better in 2020 amidst low expectations.
“We project an end-2020 FBM KLCI target of 1,670pts based on 17.5-folds our 2020F earnings projection (up 7.5 per cent), which is still at a 0.5-folds multiple discount to its five-year historical average of about 18-folds, largely to reflect the less active participation (as compared to the recent past) of both foreign and local institutional investors in the market,” it added.
It noted that the catalysts for a market rerating in 2020 could potentially come from investors’ increased appetite for risk assets, particularly emerging market (EM) equities, including Malaysian equities, a change in Malaysia’s perceived country risk premium following significant political events, and a play on the ringgit, driven by events such as FTSE Russell is to retain Malaysia in the World Government Bond Index, a steep rise in crude oil prices (Malaysia is a net exporter of oil & gas), and an end to the easing cycle with only another 25bps cut in the overnight policy rate by Bank Negara Malaysia (BNM) in 2020.
“A new equity inflow cycle to EMs has already manifested itself in the latest weekly global fund flow numbers. EM equities have already attracted net inflows since end-Oct 2019 (after flying under the radar of investors for most of 2019).
“While inflows to EM equities have thus far yet to spill over to Malaysian equities, we believe they will eventually show up on Malaysian shores.
“Our optimism is premised upon Malaysia’s weighting in the MSCI Emerging Markets Index, which we believe while small, is still relevant,” it opined.
It also pointed out that following a major underperformance in 2019 compared with both EM and DM, the FBM KLCI is now trading in line with DM in terms of price earnings (compared with at a premium previously), but still at a substantial premium over EM.
“However, the premium may be justified (at least partially) by the virtue of certain local institutional market participants occasionally stepping in to provide liquidity in times of extreme market volatility,” it added.
Steady economy anticipated
While Malaysia’s economy is still far from the one for 2020, it is still expected to record a steady for the year ahead, albeit at a more moderate pace.
Analysts believe that the economy will mainly be supported by domestic consumption as global uncertainties remain an external risk.
“The challenging global economic environment has prompted Malaysia to rely more on domestic demand to prop up growth.
“This is likely to be boosted by a recovery in public investment as well as improvement in private investment, while private consumption growth is expected to be resilient,” RHB Investment Bank Bhd’s research team (RHB Research) said.
It pointed out that already, the government would slow down its pace of fiscal consolidation in order to provide some space for the fiscal policy to assume part of the burden in supporting the country’s economic growth.
“This is as we believe private consumption is likely to grow at a more moderate pace of 6.5 per cent for 2020, albeit resilient compared to 7.3 per cent estimated for 2019.
“The moderation in growth reflects more cautious consumer spending as income growth decelerates amid slow business spending and uncertain economic environment,” it added.
Meanwhile, MIDF Amanah Investment Bank Bhd expected Malaysia’s economy to continue expanding in 2020 but at a slower pace of 4.5 per cent y-o-y compared with 4.6 per cent y-o-y estimated for year 2019 as there are more challenges ahead.
“Slowing global demand, recession fears, rising protectionism and loss of growth momentum of world’s major economies are among the factors. Domestically, sizable debt level which somehow bounds government from spending generously, expectations on rising inflationary pressure and slightly easing employment on top of currency risk could stifle private consumption.
“We foresee private consumption and services sector to grow at a slightly softer pace of 6.5 per cent y-o-y and 5.8 per cent y-o-y respectively in 2020. “
Despite its expectations of slower growth, MIDF Research pointed that leading index indicates economic growth momentum remain positive in 1Q20.
“Malaysia’s Leading Index (LI) rebounded to 0.1 per cent month-on-month growth in September 2019 from a 0.8 per cent m-o-m fall in the preceding month.
“Four out of seven components recorded increase during the month with significant contribution coming from number of housing units approved and real money supply (M1). Similarly, on annual basis, the index increased 0.3 per cent following a 0.5 per cent drop in August 2019.
“The LI’s performance is in line with those of smoothed LI which continued trending upwards, indicating that the economic growth momentum remains positive through 1Q20,” it said.
Despite the expectations of moderate growth, analysts are still optimistic on policies that are being put in place to support the economy.
Maybank Investment Bank Bhd’s research team (Maybank IB Research) pointed out that Budget 2020 has allocations and measures to revive capital expenditure (capex).
Apart from monetary policy stimulus introduced by BNM in 2019, and the lift in the government’s capex, Budget 2020 also contains allocations and incentives to revive private investment.
“Specifically, incentives are targeted and customised for sectors and industries like electronics, high-technology, tourism, green/renewable energy and creative; as well as capex for Industry 4.0 adoption, 5G infrastructure and technology roll out, as well as digitalisation and automation.
“There was also pre-Budget 2020 announcement by MIDA on the enhancements of tax incentives for principal hubs to further encourage MNCs to set up base for regional/global businesses in Malaysia.
“Government also take steps to improve its efficiency such as National Committee on Investment (NCI) co-chaired by MoF and MITI to fast track approvals for targeted, high-impact investments and customised incentives; MIDA assigns relationship managers (RM) to approved investors to help liaise with ministries, agencies, state governments and local authorities to speed up implementation of approved investments.
“The above policies and measures reflect the ‘national investment aspiration’ is for investments that raise the economy’s complexity such as reduce low-cost, low-wage activities and raise high value-add, technology-driven and knowledge-based activities; generate high-income skilled jobs for locals; inclusive economic impact in terms of balanced developments among states/regions,” Maybank IB Research highlighted.
SPV 2030: A roadmap for the new decade
Beyond 2020, the Malaysian government is already charting new paths for the new decade with the Shared Properity Vision 2030 (SPV 2030).
The SPV 2030 is the next projection of goals which, after taking over the baton from Vision 2020, is expected to become the new framework for a more developed nation.
Launched in October last year, SPV 2030 is tauted to be the government’s new development narrative, listing efforts to restructure the economy in order to afford everyone a reasonable standard of living by 2030.
SPV 2030 outlines 10-year goals to move Malaysia from being a country with a reliance on unskilled low-paying workers to a nation with high-income, highskilled labour force that is capable of attracting new investments and opportunities – in line with the latest developments in science and technology.
The aim is also to achieve sustainable growth along with fair and equitable distribution across income groups, ethnicities, regions, and supply chains.
Policies in the 2020 Budget is designed to steer the country towards that vision.
However, as with most government policies, execution is still key to its success.
Maybank IB Research pointed out that with the launch of SPV 2030, eyes are on implementation to realise the objectives and targets listed in this new growth strategy.
“In this regards, medium- and long-term plans have been – and will be – rolled out that flesh out the execution, monitoring and measuring SPV 2030 initiatives, progress and outcomes.
“Those already out include the National Policy on Industry 4.0, the National Fiberisation and Connectivity Plan (2019-2023), and the National Transport Policy (2019-2030), while those in the pipelines that we expect to come out between now and end-2020 include the National Automotive Policy (NAP) update, the 12th Malaysia Plan (12MP, 2021-2025), the 4th Industrial Master Plan (IMP4, 2021-2030), and SME Masterplan 2.0 (2021-2030),” it projected.
Meanwhile, RHB Research believed that the SPV 2030 is a sound plan as it provides a general strategy for future
economic planning, but stops short on the methods to do so.
However, it pointed out that the way to drive the 15 key economic activities identified in the plan need to be put out clearly.
“We believe there is no easy way to achieve higher-income distribution, but to gear towards export-oriented industrialisation. Malaysia’s small domestic market will limit its growth potential. However, the challenge for constant higher growth will not be easy, as exportoriented industrialisation is mired in tough global competition, especially from China.
“To ensure the success of an export-oriented policy, it needs to be led by big corporations with sizeable foreign direct investments and domestic direct investments. This is not likely to be easy as well, in our view, given the keen competition.
“In addition, this also needs to be supported by a pool of skilled labour that is educated and prepared for Industry 4.0, Artificial Intelligence, and big data – which may take time to yield the right results. As a result, the focus on education is equally as important to focus on – alongside industry-centric goals – in achieving the targets outlined under SVP 2030,” it suggested.
Pockets of growth in Malaysia’s trade market
Malaysia, as an open market, is unspared from events that affect the economies in major countries worldwide. For now, while external risks have more or less settled down, it is still too early in the year to determine the course of the year.
Nevertheless, there are still pockets of opportunities for Malaysia when it comes to its external trade.
Maybank IB Research noted that there has been a surge in approved manufacturing foreign direct investments (FDI) from US and China as US China trade war triggered trade diversions and investment relocations that benefit Malaysia.
“For the first nine months of 2019 (9M19), there was RM19 billion approved manufacturing FDI from US and China, equal to 83 per cent of the 2018 total of RM22.8 billion. Approved manufacturing FDI from US and China accounted for 48 per cent of total approved manufacturing FDI in 9M2019, up from 39 per cent in 2018 and 23 per cent in 2016 2017.
“The surge in approved manufacturing FDI from US and China in 2019 9M2019 are mainly in electronics, solar, base metals, chemicals & chemical products, rubber products, and paper products.
“Hence the improved outlook for capex in 2020. The combo of policy and measures to revive private sector capex, boost to public sector capex from growth friendly Budget 2020, and the trade diversion and investment relocation spillover from US China trade war are expected to help gross fixed capital formation to recover (2020E: up 3.5 per cent; 2019E: 2.1 per cent; 9M19: 2.6 per cent) on the back of a pickup in private investment (2020E: up three per cent; 2019E: 1.3 per cent; 9M19: 0.9 per cent) and rebound in public investment (2020E: up five per cent; 2019E: 10.0 per cent; 9M19: 12.3 per cent),” it added.
RHB Research also noted that as it stands, the US-China trade tensions that resulted in progressive tariff hikes between the two countries, have lasted for more than a year since it started in Jul 2018.
It has disrupted the global supply chain and created uncertainty, causing global GDP and trade growth to slow as businesses turn cautious and hold back investments, while consumers tighten their purse strings.
It pointed out that the pain is also being felt by the US, with its manufacturing activity collapsing as indicated by the ISM Purchasing Managers’ Index (PMI) that has been in contraction for three consecutive months and as a result, businesses have been pulling back investments and job creation, while income growth eased.
“On a brighter note, Malaysia is benefitting somewhat from the trade diversion due to the US-China trade war. Signs of a trade diversion were seen for Malaysia as exports to the US grew 7.1 per cent y-o-y in 3Q19, after a gain of 7.7 per cent in 2Q and compared with a one per cent decline in 1Q.
“Similarly, exports to China recorded a smaller decline of 0.7 per cent y-o-y in 3Q, compared with a drop of 6.3 per cent in 2Q. BNM, in a recent analysis, showed that Malaysia has gained a greater share of the US’ and China’s imports for various items such as photosensitive semiconductor device, diode-transistors, and petrochemical products,” it said.
It also highlighted that private investments are expected to record stronger growth of 4.2 per cent in 2020, compared with 1.7 per cent estimated for 2019.
“This is as Malaysia has benefited from investment diversion caused by the US-China trade tensions. As a result, the approved foreign manufacturing investment by the Malaysian Investment Development Authority (MIDA) jumped 64.8 per cent y-o-y in 1H19, after recording an increase of 169.3 per cent in 2018.
“These investment approvals are likely to be translated into actual activity, particularly in 2H20 when economic conditions should be more stable,” it explained.
“In the same vein, we expect the increase in development expenditure by the Government and the resumption of stalled projects to spill over to the private sector, resulting in a pickup in construction-related investment activity during the year.
“We are also of the view that businesses are likely to take the opportunity to start investing to improve their efficiency and competitiveness through various schemes and incentives rolled out by the government to encourage businesses to digitalise, automate and make their operations smarter.
“This will likely be aided by the return of the RM37 billion tax refunded to them in 2019. Thus far, the government has returned 75 per cent of it as at end-August 2019,” it added.
In another note, MIDF Research forecast both exports and imports growth to slightly rebound in 2020 at 1.5 per cent y-o-y and 0.8 per cent y-o-y respectively due to the lower base effect.
“We opine that commodity-based sectors particularly LNG exports to contribute to a better growth in exports especially with Petronas’s second floating liquefied natural gas named PFLNG 2 expected to be operational in 2020.
“Increasing activities in the mining sector for instance is in line with the Shared Prosperity Vision 2030 which identified commodity-based activities as one of the Key Economic Growth Activities (KEGA) to ensure its competitiveness and sustainability in the future, contributing to the economic growth,” it added.