KUALA LUMPUR (Jan 27): After a turbulent year of war, skyrocketing inflation, aggressive rate hikes and abrupt China closure, with labour shortage seen in many sectors, including the worst pandemic-hit hospitality sector, it is only to be expected that investors will be wary of what 2023 may bring.

An analyst The Edge spoke to opined that while there will continue to be general recovery in Malaysia’s economy — with China’s reopening expected to help sustain that — macro challenges relating to the very likely scenario of a recession in the US, moderating commodity prices, and moderating leading index in Malaysia could weigh heavily on both corporate earnings quality and investors’ position in the equity market this year.

Building recession-resistant equities portfolios will be crucial this year, said James Cheo, chief investment officer for Southeast Asia, global private banking and wealth at HSBC.

“History has taught us that sharp falls tend to be followed by good returns in the following year — on average about 8% for bonds and 20% for stocks. That should give investors some courage to put cash to work. And it’s obvious that following the sharp correction of 2022, valuations are more attractive and that should improve long-term expected returns,” Cheo said.

However, as public listed companies will have exhausted the low base growth effect in the last earnings quarter of 2022, core earnings are expected to be tested in 2023, said Areca Capital chief executive officer Danny Wong.

“Input costs have been rising across the board in almost all sectors, particularly in terms of labour and raw materials. These substantially increase operating costs for companies this year. We have already seen this happening last year, and [this] will continue into 2023,” said Wong.

The Edge takes a look at some of the sectors that are expected to thrive versus those that will be more challenging in 2023.

In March last year, the US Federal Reserve began a series of interest rate hikes. Its aggressive monetary policy tightening set into motion a cycle of rate hikes by central banks all over the world, including Bank Negara Malaysia (BNM). After four consecutive hikes of 25 basis points (bps), BNM raised the overnight policy rate (OPR) to 2.75% from its record low of 1.75%.

Although clearly bad news for borrowers, the banking sector has historically benefited from the higher interest rate, said Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong.

“[On a] year-on-year basis, the banks' core profits are likely to improve, underpinned by higher net interest margins in line with higher interest rates. Earnings growth could accelerate to 15% to 20% for 2023 in the absence of 'Cukai Makmur'. This could potentially allow the banks to pay out higher dividends,” Yong told The Edge.

While BNM bucked the consensus estimate of another OPR increase by keeping the key rate unchanged at its first Monetary Policy Committee (MPC) meeting of the year on Jan 19, many economists do not think this signifies the end of its tightening cycle, as core inflation remains elevated at an average of 3% in 2022.

Fitch Solutions said while core inflation remains on a firm uptrend, headline inflation is expected to stay above the central bank’s target through the first half of the year, especially with negative real interest rates. "We believe that above-target inflation and negative real interest rates will prompt further tightening by the central bank to safeguard macroeconomic stability,” the firm said in a statement.

“Core inflation hit 3% for 2022, the highest ever recorded. We opine the strong inflation trend in Malaysia is highly driven by solid consumer demand while indicators for cost inflation are on a slowing pace... With this upbeat momentum, we believe BNM may consider to raise the OPR by another 25bps to 3% in the second MPC meeting in March 2023," it said in a report on Jan 20 following the release of December inflation data.

Although BNM unexpectedly took a prudent pause on its interest rate hike on Jan 19, the central bank has guided that it is not done with the interest rate hikes yet and future rate move remains data dependent, noted UOB Global Economics and Markets Research in a separate report on Jan 20.

While it is also of the view that recent global developments and country-specific factors suggest rising challenges for BNM to hike further in the near term, it still expects BNM to make at least one more 25bps hike to bring the OPR back to its pre-pandemic 3% by mid-2023, before taking a long pause for the rest of the year.

Contractors will benefit from the rollout of public infrastructure projects, spearheaded by the massive RM50.2 billion circle metro line MRT3 project, as the new government gets down to work, said Kenanga Research in a note on Dec 16, 2022.

“We expect the new government to re-tender selective public infrastructure projects and roll out new ones, after completing reviews on certain previous job awards that were deemed not in compliance with the required procurement process,” said its analyst Joshua Ng.

There are also opportunities in the private space where there are growing opportunities in building new semiconductor plants and data centres locally as multinational corporations diversify their manufacturing bases geographically (away from China) to de-risk, Ng said.

“We expect industry margins to improve in 2023 as older contracts with low margins tail off and new contracts with more normalised margins start to contribute,” he added.

Crude palm oil prices are expected to stay elevated at an average at RM3,800 per metric ton in 2023 on the back of acknowledging palm oil as a basic consumable needed for day-to-day living, and resumption of normalised growth in the 2023 edible oil market after staying flattish since 2020, said Kenanga Research.

The research outfit added that palm oil output is also expected to grow despite labour shortages constraining Malaysia’s output to levels achieved in 2021.

“In 2023 global demand is also likely to pick up at comparable pace as the net supply-demand scenario looks quite even handed for 2023 and potentially, for 2024 as well,” said Kenanga.

However, higher operating cost from labour, fertiliser and transportation costs was a key reason for the poorer-than-expected recent third quarter of 2022 (3Q2022) results across the plantation sector.

“As such, higher productivity is key to ensure unit production cost remains competitive, hence the push to replant with higher yielding planting materials, mechanisation will add value to downstream,” noted the research firm.

Light on the property sector will be dim this year as the reopening effect fades with economic growth expected to slow in 2023, according to Maybank Investment Bank Research.

“Some developers have planned a slowdown of new launches or lowered sales target for 2023 given uncertainties on labour supply and property demand with higher interest rate,” said Maybank's Winson Phoon in a note on Jan 6.

Kenanga Research, likewise, expects the operating environment for developers to remain challenging, with unfavourable industry trends that cloud 2022 persisting into 2023.

“These include soft prices, as reflected in a weak house price index as reflected by a quarter-on-quarter contraction in 3QCY2022 despite rising construction and land costs, and the still-elevated household debt-to-GDP ratio at 85% in 1HY2022,” said Kenanga's analyst Lum Joe Shen.

The firm also cautioned about developers’ high borrowing levels going into 2023, which would translate to higher financing costs and a potential liquidity crunch.

“Already faced with a tough operating climate, developers’ earnings will be hurt further by the high financial leverage. Developers under our coverage have all shown increased net debt levels over the pandemic with the exception of a few,” Lum added.

The semiconductor and technology sector should continue to see slower growth in earnings as demand from advanced economies slows.

“We expect the semiconductor cycle to likely bottom out in the first half of 2023 before investor interest picks up again as the circular trend of technology demand persists,” said Fortress' Yong.

World Semiconductor Trade Statistics, in a November 2022 report, changed its forecast for global semiconductor demand growth in 2023 to a contraction of 4.1%, from its earlier forecast of a 4.6% expansion.

US smartphone maker Apple has also warned of longer-than-expected delivery time for its latest smartphone model which would likely dampen companies' earnings in this sector, said Kenanga’s Samuel Tan in a research note.

“The recovery of global semiconductor demand will hinge on China, given its commanding market share. However, with no clear signs on how the country can fully extricate itself from the pandemic, supply chain challenges are expected to remain going into 2023,” said Tan.