PETALING JAYA: Nomura Global Markets Research has downgraded Malaysian equities to “underweight” from “neutral” due to poor fundamentals and lack of major expansionary reforms.
Nomura, which downgraded Malaysia to “neutral” after the elections last year, has held a “neutral” on Malaysian equities since May 2018 based on the thesis that reforms prospects could keep the multiples elevated despite micros and macros not being very supportive.
“However, with the new government more than six months in power already, while there have been efforts to fix fiscal leakages, there has not been a significant reform push which can potentially lead to expansionary economic activity,” it said in its Asean Strategy report today.
Nomura said it was hoping for more progress in areas to improve government efficiency, reduce corruption and crony capitalism and potentially roll back or ease the government’s presence in some areas but has only seen some “easier” initiatives such as closing of several government agencies while some agencies have been put under direct parliamentary supervision.
While Budget 2019 included some long-term reform measures, labour or tax reforms or much needed reforms to ease property market bottlenecks are lacking.
Amidst a background where macro and micros continue to deteriorate, Nomura said the other major issue for Malaysia is that oil prices are no longer high (above US$70 per barrel) and have declined significantly recently, which could lead to further issues for Malaysia to plug the fiscal gap.
“Our economists believe there is a high risk of fiscal slippage and the possibility of a sovereign ratings downgrade that could trigger more capital outflows,” it said.
Nomura expects Malaysia’s 2019 gross domestic product (GDP) growth to be 4%, marking a sharper decline from 4.7% in 2018, and is below consensus forecasts of 4.6% largely due to a weak export sector. It also expects Malaysia to post a fiscal deficit of 3.9% in 2018 and 3.7% in 2019.
Nomura said Malaysia will continue to be a stock-pickers’ market and prefers select defensive banks, value plays like Gamuda Bhd, and thematic plays like Malaysia Airports Holdings Bhd and Vitrox Corp Bhd.
“We believe sustainable dividend yielding plays could be attractive, as well in an environment where local rates are expected to be cut; and the government’s fiscal constraints may lead to higher dividends from government-linked companies,” it added.
