Following the banking crisis in the US and Europe, we believe the sentiment will turn better in 2Q23, underpinned by (i) reopening of China’s borders, (ii) higher crude oil prices, (iii) strong growth in tourists’ arrival and (iv) well supported demand in the technology sector due to rising adoption of AI applications. However, we understand there are several concerns if (i) the Fed remains hawkish and the economy enters a recession and (ii) the BTFP has ended. Under this setup, we favour a few sectors, namely the (i) O&G, (ii) Technology, (iii) Medical, (iv) Utilities, (v) Telco and (vi) Shipping, and (vii) Poultry.

Government proposed to allocate RM386.1bn under the revised budget to boost the economy by 4.5% in 2023. Overall, the budget targets to lower down the living costs while ensuring the smooth recovery on the economy. Key highlights include the (i) higher DE of RM97bn, (ii) changes in selected personal tax structure and (iii) extension of the green energy policies. Fairly positive to the stock market given no Capital Gain Tax on listed companies was being implemented. Sectors that we favour include the construction, building material, automotive, consumer, telecommunication, tourism, plantation and healthcare sectors.

The long-awaited recovery is likely to emerge with the reopening of China’s travel borders. We believe this will be able to offset the recession risk under the (i) elevated interest rate environment, (ii) ongoing tension between the Ukraine and Russia and (iii) overheated inflationary pressure at least for 1H2023. We are feeling cautiously optimistic on the local front after (i) a solid GDP growth in 2022, (ii) stable political environment and (iii) the reopening of China’s borders. Hence, we have a few themes under our 1Q23 outlook and strategy, namely the (i) Recovery, (ii) Renewables, (iii) Commodities and (iv) Resilient.

Hung parliament is likely to contribute to the knee jerk sell down. The market may stabilise after the PM candidate is sent in at 2pm, but with some side effects. PN coalition – the market may avoid sin sectors, while focusing on shariah related. PH government – the market could focus on construction, telco and renewable energy, but may not be corporation-friendly. Traders may pick up apolitical sectors such as telco, utilities, O&G and consumer. Also, high net cash, low gearing and high dividend yield companies could be seen as good to accumulate during the knee jerk sell down.

The all-inclusive RM372.3bn budget is likely to be positive for Malaysia with the approach of providing necessary assistance to targeted groups, support for business and many other aspects of the nation. Key focus is the development expenditure, which saw a jump of 25.6% to RM95bn. Some positive surprises for the M40 include the reduction of 2% tax and cash aids under the e-Pemula initiatives. We expect some optimism to build up within the construction and building material segments, while other beneficiaries include automotive, consumer, telecommunication, technology, tourism, logistics and healthcare sectors.

Downside risks still prevail on the global markets given the (i) hawkish tone by the US Fed, (ii) ongoing tension between Ukraine-Russia and (iii) recession fear. However, there are some bright spots in the Malaysia’s market with the upcoming (i) Budget 2023, (ii) around-the-corner GE15 and (iii) rebounding Malaysia GDP. Thus, we like potential budget beneficiary sectors like solar, construction and telco. Meanwhile, for the export oriented segments we favour plastic, selected technology, medical and chemical. For domestic related sector, we may focus on automotive and furniture.

Heightened volatility was experienced due to (i) rising inflationary pressure, (ii) tension between Ukraine-Russia, (iii) hawkish Fed’s tone and (iv) recession fears. Given Malaysia has transitioned into endemic phase, it might benefit consumer & services sector with the reopening of business activities and upliftment of borders. We expect firm demand for the transportation & logistic sector moving forward. We like energy sector with the elevated Brent oil price, while the tech sector could see upward potential after a near-to-40% drop in the sub-index from the peak. We favour the banking industry under the interest rate upcycle environment.

Malaysia will be transitioning into the endemic phase and reopening the borders should boost the economic activities going forward. Global themes include (i) tension between Ukraine-Russia, (ii) inflationary pressure, (iii) Fed’s monetary policies, and (iv) recession fears, while domestic catalysts include (i) GE15, (ii) 5G rollout, and (iii) commodity supercycle. Under this environment, we like recovery-themed stocks and GE15 catalysts may boost trading interest within the construction sector. Besides, we opine the commodity-linked sector will remain strong in 2Q22.