Malaysia Strategy:4Q17GDP stats,highlights

Broad macro momentum moderated in 4Q, with QoQ growth of 0.9% (3Q:1.8%) the slowest since 1H16. Nonetheless, 4Q’s GDP growth deceleration to5.9% YoY was from a high base (3Q was a record 6.2%) and datapoints werebroadly robust i.e. contained fiscal deficit, stable current account surplus,continued real wage growth and moderated debt ratios. Coupled with amplesystem liquidity and the firmer Ringgit, domestic yield (cost of money) upsideappears controlled notwithstanding US rate hike cycle. With KLCI’s defensivecredentials intact (see Haven appeal intact), market dips are opportunities tobuy banks (CIMB, HLBK, RHB), selective government-linked companies(TNB, Telekom), construction (AQRS, Econpile), exporters (Inari, Top Glove;2H18 Ringgit trend supportive) as well as AirAsia, Time, Bursa; sell intostrength re Gamuda, DiGi, PETD.

Macro stats broadly encouraging: 4Q GDP drivers broadened from 3Q’sprivate consumption-centric impetus, with private investment growth morethan doubling YoY, while public consumption and net exports were stronger(Figs 1-3). After a surplus in 3Q, fiscal deficit was a muted 2% (Fig 4), taking2017 fiscal deficit to in-target 3% and government debt/GDP lower to 50.8%(2016: 52.7%). Current account (CA) surplus was flat vs. 3Q, at 3.7% (Fig 12).

MGS yield upside tempered: The benchmark 10yr MGS yield has traded ina relatively tight 13bps range YTD, while foreign holding of MGS recoveredsteadily since 1Q17 (Fig 6). Positive fiscal, CA trends and RM189bn surplusliquidity placed with BNM are buffers tempering sharper pressure on yields.

Wages, household data supportive: private sector nominal wage growthmoderated albeit a still robust 6.3% (3Q: 7.5%; Fig 9) which, together withstubbornly high CPI (3.5%), resulted in real wage growth slowing to 2.8% (3Q:3.9%). Household debt/GDP ratio continued to trend lower, to 84.3% (3Q:84.6%; Fig 11). Advancing balance sheet repair, coupled with a fourth straightquarter of faster growth of household financial assets (Fig 10) and real wagegrowth should buttress consumption notwithstanding Jan’s 25bps rate hike.

Property, oil & gas stress linger: BNM’s focus article on affordable housingsuggests demand-supply mismatch issues persist, with 2Q unsold residentialproperties hitting a decade-high (Fig 14) even as excess supply hampersrental rates for office and shopping complex space (Fig 17). Despite crude oilprice recovery, delinquent and impaired loan ratios in the oil & gas sector rosesharply in 4Q, to 0.6% (3Q: 0.1%) and 5.5% (3Q: 5.0%), respectively.