Market Analysis and Strategy “Oasis of Economic Announcements Next Week; Budget 2014 Is Coming”

by **Cals** Sun 20 Oct 2013, 19:29

Market Analysis and Strategy “Oasis of Economic Announcements Next Week; Budget 2014 Is Coming”

Business & Markets 2013

Written by Rosnani Rasul of M & A Securities Research

Saturday, 19 October 2013 15:39

KUALA LUMPUR (Oct 19): As expected, the US has been able to strike a deal to end the budget and debt ceiling impasse. The global equity market got excited following this, resulting in S&P 500 to touch record high while the regional market rallied, recovering its previous 2 weeks of losses. The congressmen in Capitol Hill voted for the US government to operate until 15^th January while allowing its Treasury to have enough coffers to service its debt until February 7^th. All in, the US government shutdown lasted approximately 16 days. Despite the temporary reprieve and added with the fact that the US recovery is patchy so far, we opine that there are growing arguments that the US quantitative easing measures should be done next year.

The less-than-glowing recovery pace so far calls for a delay on this, otherwise the US can risk falling into recession. The economy needs a performance drug and the quantitative easing measures will be the most potent measures to keep it going. Hence, our conviction on the timing of tapering which for now looks increasingly ideal to be done next year. The next US Federal Reserve FOMC meeting is schedule on the 29-30^th October with the final one slates on the 17-18^th December. Added with the fact that the current Federal Reserve chairman, Ben Bernake, will end his term soon, there is no reason for him to take the bulk of the blame on calling the tapering. Might as well leave the heavy lifting to the next incoming chairman, Janet Yellen.

The recent government shut down has resulted in the back log of US economic announcements. There will be oasis of announcements from the US in October - at least 29 altogether. Chief important that we should pay attention is the US housing related statistics namely the new home sales, existing home sales, building permits and housing starts. In addition, we also should pay heed to the US unemployment rate for August and initial jobless claim. All these indicators will give a hint on the health of the US economy and hence, the timing of the tapering. In addition, next week will also see crucial economic releases from the Eurozone (consumers’ confidence and PMI related numbers), Japan (trade and leading index), China (September property prices and HSBC Markit Flash PMI Manufacturing) and Malaysia (forex reserve).

Malaysian government will be tabling its 2014 Budget on Friday next week. Fresh from the victorious 13^th General Elections, the 2014 Budget tabling will showcase what Barisan Nasional (BN) had promised during the campaigning period. On what to expect coming, it is advisable that the investors refer back to BN’s manifestos. There are 31 promises in total but only a few related to the equity market. To summarise all, we opine that the market has plenty to be excited about. As usual, there will be potential winners and losers. Let start with the winners – we opine that consumers sector as a whole will benefit following the anticipation of higher BR1M. In BN’s manifestos, BR1M 3.0 will be increased from RM500 per household (i.e. BR1M 2.0). Note that BR1M will be increased in gradual pace to eventually reach RM1,200 per household by 2018. To make the targeted financial assistance more efficient, BR1M 3.0 may be deposited directly into the bank account of those that is eligible.

In addition, the people can expect a gradual decrease in car prices, broadband and continuation of smart phones subsidies for below 20-year old age. We also expect the government to announce a half month bonus or minimum RM500 for 1 million government servant and 600,000 pensioners. Assuming that the amount budgeted is RM4 billion, marginal propensity of spending will add about 0.3%-0.4% to Malaysian 2013 GDP, assuming that the bonus will be paid in December, in line with historical trends. The potential losers will be the property market as we expect real property gain tax (RPGT) will be tightened to keep in check the increase in property prices. Banks, unlike our previous prediction, will escape unscathed this time around as the government may likely opt for a more targeted approach to keep a lid property prices. Since it just recently revised the loan tenure of housing loan refinancing to a maximum 10 years, we don’t see any further tightening in lending requirement in this coming budget.

In addition, the government will likely share its timeline on government service tax (GST) where we expect a soft roll out next year. We foresee the GST introduction rate to be in the region of 4%-5%, which is neutral in our view and hence, minimal impact to the economy, if any. In line with this, there could be a wild card in corporate and individual tax cut.

The thunder in the 2014 Budget could be the resumption of subsidy rationalization plan which has been put on hold temporarily following the 13^th GE. The government may have to bite the bullet on this otherwise budget deficit cannot reach the 0% target by 2020. To offset against the public cry on this, we opine that the government may appease the soreness via higher BR1M 3.0 and lower individual income tax rate (for middle income).

As usual, these guesstimates on the budget will keep the momentum going for the equity market. Nonetheless, in line with historical trends, the momentum will lose steam mid-way next week as some may take some profit following the recent rally. Added with the heart beating economic announcements next week, we expect the local market to give up some points on week-on-week basis come next week.

Rosnani Rasul of head of research at M & A Securities Research