PETALING JAYA, Malaysia - Pricey valuation may limit the local bourse's upside, although the country has, for the moment, fended off potential stock sell-off inducing rating downgrades after announcing measures last Friday to broaden the tax base and lower the fiscal deficit.
Analysts said the budget unveiled on Friday contained some hits and misses. While lauding the strong commitment towards fiscal reform, they also lamented the lack of specific details on the Government's subsidy rationalisation programme.
Fitch Ratings, for one, is keeping a close watch on the Government's fiscal consolidation and reforms. The firm highlighted three key announcements - the Government's commitment to meet its budget deficit reduction goals, budgeted cuts in its subsidy bill and the introduction of the goods and services tax (GST) - as "potentially constructive" for Malaysia's sovereign credit profile.
"We would look, however, for a track record of implementation towards the stated goal of deficit reduction (as a percentage of gross domestic product or GDP), backed by subsidy rationalisation and the GST introduction over 2014-2015," it said in a press statement yesterday.
The ringgit yesterday strengthened to as high as 3.1350 against the US dollar, its strongest level since mid-June, on inflows of funds from overseas.
But foreign fund managers may have side-stepped local equities yesterday, as the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) held steady at a near-record high to end the day up 0.82 points to 1,818.39 points.
"As valuations of the FBM KLCI are no longer cheap, we believe the market would likely be stuck in a range-bound trading pattern. While the country has pulled back from an imminent sovereign rating downgrade, there is no significant catalyst for a market re-rating," RHB Research analysts, led by Alexander Chia, noted in a report.
The firm kept its end-2014 FBM KLCI target of 1,910 points unchanged, based on 15.5 times one-year forward earnings, and mentioned that high-growth sectors and stocks would be in play, as the economy was on track to gain momentum going forward.