S E C T I O N 3 S T R A T E G I C P E R F O R M A N C E 57 MARKET REPORT SUMMARY 1. Economic Overview The levies imposed on the corporate sector in Budget 2022, especially Cukai Makmur, coupled with the spread of the Omicron variant, derailed what we had initially expected to be a strong finish to 2021 for the laggard KLCI, per our 2H 2021 Strategy report (Deferred, not derailed, dated July 5). While 2022 has a prima facie equities-supportive backdrop per sustained economic recovery, continued albeit moderated fiscal and monetary support, strong commodity prices and relative attraction vs. fixed income, the domestic market will need time to ‘recuperate’ from Budget 2022 measures that are resulting in a GDP-divergent YoY earnings contraction for the KLCI, its’ fourth in five years. Coupled with policy risks (i.e. populism, inertia) ahead of general elections (GE15) that must be held by mid-2023, early polls are the best-case scenario for cementing a sustained market recovery into 2H22. We retain a balanced positioning, via a mix of value and growth stocks, and continuing yield focus The KLCI spent much of 1H21 range-bound as optimism around vaccine availability was offset by the slow pace of vaccinations and political tension. The Aug change in Prime Minister coincided with the peak in pandemic restrictions, with a surge in vaccinations and paced economic reopening supporting the subsequent market uptrend. However, a populist turn in policymaking into Budget 2022 (extended loan moratoriums, Cukai Makmur) deflated sentiment and overshadowed mitigating positives such as robust corporate reporting, undershooting NPLs and strength in the exportoriented manufacturing and commodities sectors. While retail participation remains high, sustained selling by foreign and especially domestic institutional investors resulted in the KLCI being the worst performing benchmark in ASEAN 2021 (Extracted from Maybank Economic Report 2021: Malaysia 2022 Market Outlook) 2. Malaysian REIT 2021 remained a challenging year for M-REITs, especially for those with high exposure to retail and hotel assets, due to the movement restrictions. Earnings were mainly dragged by higher provision of rental assistance to eligible tenants, softer occupancy rates (selected properties) and drop in non-rental income (i.e. car park, advertising). Despite that, earnings were cushioned by lower interest rate environment, which translates into cheaper financing costs for selected borrowings. We expect an earnings recovery for M-REITs in 2022 following the recent re-opening of the economy and easing of movement restrictions, as we expect lower rental support to tenants, increased footfalls at shopping malls and an improved outlook for domestic tourism. Nevertheless, we believe hospitality segments will still see weaker growth in the absence of foreign tourists due to international border restrictions. Overall, we remain cautious following the emergence of another Covid-19 variant, coupled with the current challenging market which will continue to limit rental growth for M-REITs. In terms of acquisitions, we continue to favour prime malls with prominent locations, as well as office and industrial assets with long-term tenants. No major acquisitions were announced by the REITs in 2021, save for Axis REIT, which has completed MYR255m worth of new asset acquisitions in YTD-2021. Its’ peers, which are mainly retail REITs, did not inject any new assets during the year. Current gearing level for our coverage mostly stands between 0.23x – 0.38x, providing debt headroom for new acquisitions (based on a borrowing limit of 60%). (Extracted from Maybank Economic Report 2021: Malaysia 2022 Market Outlook)
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