59 ANNUAL REPORT 2022 1. ECONOMIC OVERVIEW For Malaysia macro, economic growth is set to slow in 2023 to 4.0% (2022E: 8.0%) as global economy is expected to experience a mild recession (2023E: 1.7%; 2022E: 2.9%) amid stagnation/recession in major advanced economies (i.e. US, Eurozone, UK) on the impact of high inflation and the resultant high interest rates. Several factors mitigate the downsides to domestic economic outlook. First is the growth-friendly moderate OPR hikes from the “accommodative” record-low of 1.75% since May 2022 to the “neutral” level of 3.00% by Jan 2023. Second, drawdown of excess individual/household savings built since Jan 2020 amid lockdowns and economic stimulus measures provide a buffer to consumer spending. Third, recovery in inbound tourism provides the next leg for the growth tailwinds from full economic opening. Fourth, investment outlook is positive amid a technology-driven surge in approved investment/FDI since 2021 e.g. capex in electronics industry and data centres; automation and digitalisation; 5G infrastructure rollout. S everal lookouts and wildcards are on our radar. Inflation and interest rates will remain the key macro variables to watch. China’s growth outlook (2023E: 4.0%; 2022E: 3.3%) will be dependent on its zero COVID-19 policy exit conundrum and the management of its real estate doldrum. Early and faster re-opening of China will be positive for global and Malaysia’s economic conditions in terms of trade, investment and tourism flows. Domestically, post-GE15, eyes will be on the re-tabling of Budget 2023 in early-2023 as well as the new government’s policies, including the medium-term fiscal stance. R e Malaysian equities, while fading reopening tailwinds and interest rate hikes will weigh on growth in 2023, market earnings expansion ex-Gloves is nonetheless forecast to strengthen to +17.3% YoY (2022E: +13.4%) as Cukai Makmur expires, bank sector profitability continues to improve and on accelerating recoveries at laggard sectors like casino-gaming and transport/ aviation. Political risk premium is moderating following Nov’s general elections (GE15) having ultimately yielded a PH-led ruling coalition with a solid majority in Parliament, boding well for improved governance and expedited policymaking. A fast-tracked reopening by China will boost trade, tourism and commodities demand/prices. Growth/earnings-disruptive policy changes relating to subsidies and taxes are now unlikely to surface in 2023 as the government focuses on cost-of-living issues, with interim fiscal gap likely to be bridged by a combination of cost cuts, curbing of fiscal leakages and PETRONAS. Re thematics, with a new reformist-leaning government taking the helm, GLC Reform could be back on the table, potentially sparking secular economic and market impetus; interest rates and inflation headwinds are diminished but remain topical, as does dividend yield. Investors also need to pay attention to Sustainability/ESG, as detailed in MY ESG Compendium 2022 (“Shifting into higher gear”, dated Nov 29) as well as market impacts from robust FDI inflows, underpinned by supply chain relocation. (Extracted from Maybank Report: Malaysia 2023 Outlook and Lookouts) 2. MALAYSIAN REIT I n retrospect. 2022 was a recovery year for M-REITs, especially for those with high exposure to retail and hotel assets, due to the re-opening of the economy that led to lower rental support to tenants, increased footfall at the shopping malls and improved tourism activities. Earnings, however, were partly dragged by the higher interest rates in the 2H22 due to multiple hikes in OPR, which translated into higher financing costs for floating-rate borrowings. W e remain Neutral on the sector going into 2023. We continue to like prime retail malls which are in prominent location which, in turn, would drive high shopper traffic and consequently, high tenant demand for the malls’ retail space. We also prefer office assets with long-term tenants which therefore entail lower occupancy risks. On the contrary, we are cautious on neighbourhood malls and multi-tenanted offices in the Klang Valley which would be at higher risk of being negatively impacted by the oversupply of retail and office space. Additionally, the acquisition of yield-accretive assets could help support growth. M eanwhile, we anticipate that 2023’s growth will be largely organic but would remain challenging due to the oversupply of shopping malls and office towers in the Klang Valley. This would increase occupancy risks and exert greater pressure on rental adjustments. We expect low single-digit positive rental reversion across most Klang Valley mall and office properties. Properties with triple net leases and master leases would remain defensive (e.g. office and hospitality assets) backed by their long-term lease structures with rental step-ups.stands between 0.23x – 0.38x, providing debt headroom for new acquisitions (based on a borrowing limit of 60%). (Extracted from Maybank Report: Malaysia 2023 Outlook and Lookouts) MARKET REPORT SUMMARY
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