Market outlook for 2023F: Another challenging year ahead

ANALYSTS at CGS-CIMB believe that 2023 will be another difficult year with multiple factors influencing corporate decisions at the start of the new fiscal year.

According to them, Malaysian corporations will have to adjust to the new policy environment, rising costs, and slower global growth.

“We are of the view that 2023F is likely to be another challenging year as Malaysian corporates will need to adjust to the new policy landscape under the Anwar-led government and adapt to rising operating costs as the government is likely to rationalise fuel and electricity tariff subsidies,” the analysts wrote.

They go on to say that local corporations will face global headwinds such as slower global economic growth and higher interest rates.

They will also have to deal with the consequences of the ongoing Russia-Ukraine conflict, which could keep commodity prices high.

On the other hand, they also expect most of the global economic pessimism to be priced in by 1H23F, with the market performing better in 2H23F.

Potential bright spots are return of foreign funds, mergers and acquisitions (M&A) activities/synergies, a stable government, and clarity on the new government policies.

Nevertheless, investors are likely to stay cautious in 1H23F as they look for clarity on policies from the new government and potential additional taxes in the new Budget 2023 (likely to be tabled in Jan/Feb 2023F).

“However, we think downside could be capped by the expectations of stronger KLCI earnings growth of 12.8% in 2023F (vs. -2.9% in 2022F) and KLCI’s undemanding valuations (forward P/E of 12x, trading at close to 2 s.d. below its 3-year mean),” they said.

With foreign shareholding close to its historical low, domestic institutional investors could turn net buyers in the market on improved liquidity.

Investors will also look to gauge the stability of the new unity government through several key events, such as UMNO party elections and six state elections.

Since the 15th general election (GE15), the government has cut down special draws for Number Forecast Operators (NFO), put on hold several flood-mitigation projects worth RM7 bil that were previously awarded via direct negotiations.

One of the big political game-changer will be government plans for implementing a targeted subsidies regime.

They also floated the possibility of eliminating cartels in the food and essential supply sectors.

The Communications and Digital minister Fahmi Fadzil also said the government have decided to review 5G deployment plans through DNB.

“Although the review of these policies could lead to short-term concerns over earnings risks, we expect them to be priced in by 1H23F, and the market to rebound in 2H23F.

“We think downside could be capped by expectations of a stronger KLCI earnings growth of 12.8% in 2023F (vs. -2.9% in 2022F) and the KLCI’s undemanding valuations (forward P/E of 12x trading at close to 2 s.d. below its three-year mean).

Raising end-2023F KLCI target to 1,633 points

“We lower our KLCI target for end-2022F to 1,510 points (based on 12.8x P/E) but raise our end-2023F KLCI target to 1,633 points (based on 13.3x P/E) to reflect policy risks and fine-tuning of methodologies,” the analysts said.

They project KLCI earnings to decline 3% in 2022F before rising by 13% in CY22F.

They also like the bank, gaming, utilities, healthcare, brewers and packaging sectors; our top three stock picks are Malaysia Airports, MRDIY and RHB Bank.

“Key downside risks to our earnings projections are slower global growth, regulatory risks, higher taxes, and political uncertainties.

“Potential upside risks to earnings are synergies from M&As, clarity on government policies, and higher-than-expected tourist arrivals.” – Dec 19, 2022


Main pic credit: Getty

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