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KUALA LUMPUR, April 21 (Reuters) - Morgan Stanley is upbeat on Malaysian stocks, expecting them to benefit from a likely fiscal boost ahead of an election that could be called as early as September.
The U.S. bank initiated coverage on Malaysia in a note released on Thursday, with an 'overweight' recommendation on what it called its "second most-preferred market in ASEAN after Indonesia."
Morgan Stanley said in the note that the upcoming national election may take place as early as September or October, based on previous election periods and media reports, and this would favour the Malaysian equities market.
"The best entry point is two months before the dissolution of parliament; when Malaysia has outperformed Asia excluding Japan and Southeast Asia by 4-6 percent," the bank said.
Malaysia is due to hold an election by August 2018, and a government official has told Reuters that Prime Minister Najib Razak could call for a poll in the second half of 2017.
"A fiscal boost helps to improve consumer and business sentiment before elections. Given the high public debt to GDP ratio and tight fiscal deficit target, there are concerns that such measures may not precede this election. However, we believe there are a number of spending incentives already in the 2017 budget," Morgan Stanley said.
The bank noted that the MSCI Malaysia index has risen 6.6 percent since the start of 2017, and is trading at higher than historical price-to-earnings, but said there were other factors in Malaysia's favour.
They include infrastructure development, with China as a new source of funding, as well as rising oil and palm oil prices, which are yet to be reflected in the market, and expectations of an upturn in corporate earnings.
China has ramped up investments in Malaysia as part of its "One Belt, One Road" projects. In November, Malaysia signed 14 agreements with China amounting to $34.4 billion, which included collaboration to build rail projects in Malaysia.
A cheap and supported currency was also a boon to the market, the bank said, as the real effective exchange rate of the ringgit is at a 14 percent discount to its 10-year average.
Bursa Malaysia has climbed 6.9 percent so far this year and the Bursa Small Cap Index has rallied 18.13 percent, making it one of the best performing indexes globally. (Reporting by Liz Lee; Editing by Susan Fenton)