Malaysia 2017 outlook: Cautiously optimistic

After a year of consolidation and adjustment, Malaysia’s real GDP growth is expected to improve from an estimated 4.1 per cent this year to 4.2 per cent year-on-year in 2017. The pick-up in growth is likely to be supported by domestic demand.

Consumers have been under tremendous pressure in 2016, with the government cutting subsidies and job market softening. Despite that, consumer spending has been recovering steadily. We are cautiously optimistic that consumer spending will continue its recovery path in 2017, underpinned by government stimulus and minimum wage hike back in July. Consumers are also believed to have acclimatized with the new GST system implemented more than a year ago. In 2017, there is also possibility for the government to introduce more stimulus measures to bolster consumer sentiment prior to an election, which is due on 2018. However, the pace of recovery is expected to be gradual as high household debt will continue to cap on the upside.

Government revenue is expected to improve from higher collection from direct taxation and oil related revenue, assuming improvement in consumption and investment activities and firmer oil prices ahead. This should allow the government to expand spending without putting a strain on its fiscal position.

Government’s pump primping agenda will likely persist moving into 2017. MRT 2 and Pan Borneo Highway are few of many large scale infrastructure projects which expected to kickstart next year. Upcoming projects in the pipeline include the high-profile Bandar Malaysia and KL- Singapore High Speed Rail ( HSR), which will create new infrastructure jobs that could set the stage for election play in 2017/18. These high multiplier projects may create positive spill- over effect, which in turn support the domestic investment activities moving into 2017.

Despite a gradual pick up in consumer spending, consumers are likely to be cautious and selective with their spending as a full bound recovery has yet to be seen. As a result, Consumer Discretionary sector is not expected to see a meaningful recovery at this juncture given that spending for big ticket items could remain lacklustre amid cautious consumer sentiment. On the other hand, Consumer Staples sector, may more or less see stable earnings growth ahead due to its resilient nature.

Big scale infrastructure projects in Malaysia have created numerous infrastructure jobs for those construction players, which could keep them busy moving into 2017. Successful tenders for those upcoming government projects in the pipeline would also improve earnings visibility for the coming years.

As economic growth is projected to pick up, the outlook for corporate earnings looks brighter ahead. Our expectation is that corporate profit to regain positive momentum and grow at a moderate pace in 2017, ending the two-year earning recession in 2015 and 2016.

While the Malaysian equity market is only expected to provide a modest rate of return, investors should not shy away completely from the Malaysian equity market given its important role in portfolio diversification (from the perspective of a Malaysian investor). As such, we advise investors to consider an allocation of 15 per cent to 20 per cent in Malaysian equities within one’s equity portfolio.

For domestic exposure, given the muted return expectation for the big cap segment, investors should consider underweighting index- tracking passively managed funds as their performance tends to track closely the performance of large cap stocks. In this regard, actively managed fund is preferable as the fund managers will be able to generate alpha through their superior stock picking skills.