PETALING JAYA: Price action on Bursa Malaysia post-Budget 2025 in the short term will likely be cautious with a negative bias as investors price in the measures announced, including the new 2% tax on dividend income and the higher minimum wage level of RM1,700.
The latest Madani budget clearly highlights investments in companies that align with policy themes.
In summary, the budget is likely to be net positive for the banking, consumer, renewable energy (RE), artificial intelligence- related sectors and data centres, healthcare equipment and property (slight positive) and negative for labour-intensive manufacturing, steel and sugary drinks beverage producers, mainly the fast moving consumer goods product makers.
“Generally nothing fundamentally unexpected from the budget. At its core, it was promoting fiscal discipline with a focus on people’s welfare and enhancing local education and skills of the workforce.
“We believe the rationale for the tax on dividend income is to tax the ultra-rich individuals and will have a lesser impact on mass retail individuals,” said Nixon Wong, chief investment officer at Tradeview Capital.
By assuming an average of 4% dividend yield, he estimated the new tax would only impact those whose capital invested is above RM2.5mil.
He expects the banking stocks which are major dividend plays and largely dominated by institutional investors – local and foreigners – unlikely to be subject to this tax, hence a minimal impact to the benchmark FBM KLCI.
However, since large caps are the ones which pay dividends, Wong said certain investors may shift their investment focus towards stocks with higher growth profiles such as those in the small to mid-cap space.
Although positive about the outlook for the local market over the medium to long term, he stuck to his 1,650-point year end target close for the local benchmark, given near-term volatility on the macro side due to the pending US presidential election (Nov 5) and the upcoming corporate result season.
Wong said concerns on the implementation of the RON95 fuel subsidy rationalisation, scheduled in mid-2025, could cap index valuation upside.
Perceptions matter in the investment world and CIMB Securities stated that while the 2% dividend tax rate may not seem substantial, it could be viewed negatively by some investors as it reduces Malaysia’s attractiveness relative to other markets for wealthy investors in addition to the corporate income tax.
The new tax could result in additional administrative costs if Malaysian companies are required to withhold tax on dividend income. “Investors may shift focus to higher-growth stocks, other asset classes or products to reduce their tax burden, due to concerns that the government could broaden this tax in the future,” it warned in a report.
The budget delivered fewer candies to share investors but relayed a strong intention from the government to expand its revenue base. In that sense it may be deemed negative to investor sentiment.
Some of the “positive” announcements were just reiterating what the government had signalled in the Madani Economy Masterplan, said analysts.
Furthermore, the proposed multi billion ringgit high speed rail (HSR) or MRT3 projects were not highlighted in the budget. Prime Minister Datuk Seri Anwar Ibrahim cited the chance of launching more mega-scale infrastructure projects is minimal, all indicating there might be less excitement for investors in the market.
“The narrative of investing in the Malaysian market ahead will turn from being hype driven by news to focus on how the execution of these measures will impact the businesses.
Selecting quality businesses that have a solid balance sheet and business model that align with the government’s framework (New Industrial Master Plan or National energy transition roadmap) will be a better alternative,” Kevin Khaw, senior research analyst at iFAST Capital told Starbiz.
Research houses like Phillip Capital Research and CIMB meanwhile expects the increase in minimum wage to RM1,700 from RM1,500 and mandatory EPF contributions for foreign workers by employers to benefit the consumer sector but hit sectors heavily reliant on foreign labor, such as plantation and manufacturing (including electronic manufacturing services, rubber glove makers and technology) in the near-term.
Plantations companies could offset the higher wage bill against the rise in the windfall profit levy threshold for palm oil by RM150 per tonne to RM3,150 a tonne in Peninsular Malaysia and RM3,650 tonne in Sabah and Sarawak effective Jan 1, 2025.
The move to revise the market price structure and export duty rates for crude palm oil starting next month (November) is another plus for the sector but may not be enough according to early number crunching by analysts.
“The increase in the windfall profit levy threshold for Malaysian plantation companies, which we estimate could boost earnings by 0.7% to 2%, based on our preliminary estimates.
However, the higher profits are expected to be more than offset by the increased minimum wage, which could reduce earnings for the plantation companies under our coverage by 2% to 4%,” CIMB Research stated.
While Budget 2025 might not be entirely friendly to the equity market, it could be a boon to the ringgit to appreciate further over the medium term.
“The government’s intention to widen the revenue base and subsidy rationalisation is marching towards the goal of narrowing the fiscal deficit. With that, it could increase the government creditworthiness, not to mention our assumption of semiconductor upcycle to boost exports and FDI inflow to support ringgit further. Our 2025 target for the ringgit US dollar pair is 3.75,” said Khaw.
The local unit, has retraced some its earlier gain due to the hotter-than-expected US labour market and safe haven states which strengthened the greenback. The ringgit closed the trading week at 4.3 against the greenback.
From a fundamental perspective Wong of Tradeview said the move to reduce Malaysia’s fiscal deficit and projection of sustained economic growth provides support for the ringgit and is likely to be attractive to foreign inflows.
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