KUALA LUMPUR: Malaysia's full-year gross domestic product (GDP) growth is expected to average around four percent in 2023, supported by strong private consumption, according to AHAM Capital Asset Management.
However, economic momentum may start to dwindle in 2024 amid a recalibration in spending patterns among consumers due to subsidy rationalisation.
"An increase in the sales and services tax (SST) rate to eight per cent could exert further pressure on spending as consumers refrain from high-value purchases," AHAM Capital said in a report.
In terms of inflation, AHAM Capital said near-term expectations are subdued.
While there are upside risks to inflation due to necessary subsidy rationalisation measures, they are unlikely to prompt any policy adjustments by Bank Negara Malaysia on the overnight policy rate (OPR).
The firm noted that bond markets had priced-in the peak of terminal rates at three per cent, assuming the absence of any inflationary shocks.
AHAM Capital also expects a lower government bond supply next year, as Malaysia continues along its fiscal consolidation path.
The government is targeting a fiscal deficit of 4.30 per cent in 2024 which translates to a net issuance of RM85 billion in government bonds.
This is RM20 billion lower compared to the previous year.
"Additionally, government guarantees (GG) are expected to remain unchanged, primarily due to the absence of any new major infrastructure projects as well as a commitment to financial prudence in managing off-balance sheet items by the government.
"A lower government bond supply profile, coupled with sustained demand provides a favourable backdrop for ringgit bonds especially in terms of technicals," it added.
Meanwhile, AHAM Capital said as developed markets approach their peak cycle, risk appetite is expected to return to the emerging market (EM) space which will benefit the local bond market as foreign investors are still underweight Malaysia bonds.
Foreign investors have also been encouraged by recent fiscal measures aimed at optimising government spending and narrowing the fiscal deficit.
Furthermore, it said there is strong support from real money investors such as institutional players that should provide a buffer against any potential rise in yields.
"This is especially with the various Employees' Provident Fund (EPF) special withdrawals during Covid-19 now firmly behind us," it noted.
AHAM Capital said there had been encouraging signs pointing to a return of foreign inflows since July 2023, thanks to an improving domestic macro situation.
It added that historical pattens suggested a strong correlation between FTSE Bursa Malaysia KLCI (FBM KLCI) returns and foreign flows as seen over the past 10 years.
"The only exception was in 2020 and 2022 due to outsized performance by glove stocks during the pandemic which caused the divergence," it noted.
The firm said another key catalyst for the local market is corporate earnings which are expected to recover from a low base.
The rebound comes as corporates move past some of the most challenging headwinds such as Covid-19 lockdowns and adjustments in the minimum wage and electricity tariffs.
In terms of thematic focus for domestic portfolios, AHAM Capital said the property sector having gone through a prolonged downcycle is poised for a recovery next year supported by healthy economy and low unemployment rates.
The firm saw a strong upside as sector valuation remains way below its heydays, even after a decent run-up this year.
On renewable energy portfolio, the firm said its positive view is underpinned by the National Energy Transition Roadmap (NETR).
The new framework is a win-win for all stakeholders as it presents a solid economic case for all players and drive demand for renewables.
Within the income bracket, AHAM Capital foresees opportunities in banks, real estate investment trusts (REITs) and telcos which offer attractive dividend yields to generate a stable income stream for its portfolios.
On healthcare portfolio, the firm said ageing population and rising insurance penetration are structural drivers for private healthcare services.
"Additionally, we see room for earnings upside as previously delayed elective surgeries return alongside medical tourism," it noted.