KUALA LUMPUR - Like every classic tale, Malaysia’s economic outlook for 2023 is expected to have two halves, with a gloomy outlook predicted in the first half and improving conditions in the second half set to revive sectors like tech and construction.

Economists do not expect the nation’s strong economic growth witnessed in 2022 to continue into 2023 as consumer pessimism weighs significantly on growth.

Malaysia recorded double-digit economic growth of 14.2 per cent in the third quarter of 2022, driven by an encouraging performance in all economic sectors, especially services and manufacturing.

However, economists reckon that domestic consumption will slow significantly by end-2023 due to cumulative inflationary pressure, the waning effect of the Employees Provident Fund’s special withdrawal scheme that was imposed in April, and the expiry of the car sales tax exemption. This could be further impacted by the government’s potentially more restrictive spending.

Cautious investor sentiment will see consolidation on the benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) in the first half of 2023 due to the global economic slowdown, potential downside to corporate earnings and the Umno party elections in January, said UOB Kay Hian Malaysia head of research Vincent Khoo.

“Investors globally will be assessing the cumulative effects of interest rate hikes on economies, as well as anticipating economic and corporate earnings recessions in the Western world,” he told The Straits Times.

He expects high-yielding stocks to be appealing in the first quarter, with back-ended dividends, anticipated special dividends, and stocks with exceptionally high yields.

The FBM KLCI is likely to turn positive in the second half of the year, ahead of a global economic recovery that is expected in the fourth quarter of 2023, he added.

“Stocks with exceptionally depressed valuations could outperform as investors position for a cyclical economic recovery in the second half,” noted Mr Khoo.

For 2023, UOB Kay Hian Research foresees gross domestic product growth halving to about 4 per cent due to a slowdown in domestic consumption in the country.

However there will be some bright spots amid the slowdown.

Economic reopening after the pandemic will benefit tourism-related stocks and firms that recruit foreign workers, said Mr Khoo.

The compelling winners would also include tech stocks, due to trade diversion arising from the United States’ sanctions against China, while the semiconductor recovery cycle will begin in the second half of 2023, he added.

Another major theme is the green agenda, which benefits industrial metal smelters that are dependent on hydroelectric power, firms within the electric vehicle industry and, indirectly, selected oil and gas asset owners.

Brokerage firms reckon that construction stocks are expected to shine in 2023 after two years of the sector being throttled by multiple movement restriction orders due to Covid-19 outbreaks at worksites.

Rakuten Trade head of research Kenny Yee foresees a rosier outlook for the construction sector in 2023, supported by the eventual awarding of MRT3 contracts that would benefit other industries such as building materials.

“Construction stocks will benefit from good news about the smooth progress of ongoing mega infrastructure projects such as the Pan Borneo Highway in Sabah, Johor Bahru-Singapore Rapid Transit System and East Coast Rail Link,” Mr Yee told ST.

Banking stocks would be among the best performers, in view of the expanding net interest margins due to Bank Negara’s overnight policy rate (OPR) hike expected in the first half of the year, he added.

Analysts expect the central bank to raise the OPR by 50 basis points to 3.25 per cent in the first half.

Oil and gas counters look set to finish top of the gainers list due to China’s reopening, as its oil demand is expected to recover strongly in 2023, added Mr Yee.

UOB Kay Hian Research is keeping an “overweight” call on the oil and gas sector on expectations that it will perform well as oil prices are set to remain high.

“We still believe Opec (Organisation of Petroleum Exporting Countries) supply management will reduce the oil price downside volatility, potentially setting an oil price floor at US$80 per barrel. Service players’ earnings tend to have a lagged correlation to oil prices, hence they may benefit from higher contract rates once the renegotiation with Petronas is successfully concluded in 2023.”

Property stocks however, could stand to be the biggest losers on Bursa Malaysia due to the oversupply of properties, Mr Yee said. Exporters to the US are also likely to be hit by weaker demand due to rate hikes, he added.

Despite the headwinds from the US, he is optimistic the FBM KLCI index could touch 1,800 at the end of 2023, as there may be a flight of funds from Western countries to Asia due to better valuation of stocks.