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       THE year 2021 has not been very kind to the local stock market. Investors who benefited from the bull run in 2020 have been having the opposite experience this year.

       The local stock market has been on a roller-coaster ride, impacted by issues such as lengthy lockdowns, high Covid-19 infection rates, travel restrictions and political uncertainties.

       The main index of Bursa Malaysia, the FBM KLCI, has been in a negative territory year-to-date. It is likely to remain negative for the rest of this year.

       The FBM KLCI is still underperforming most of its regional and global peers.

       On a year-to-date basis, the index has declined more than 6.23%, while the Indonesian Jakarta Composite Index, Singapore Straits Times Index, Stock Exchange of Thailand and the Philippines Stock Exchange have surged by 9.98%, 13.70%, 12% and 2.82%, respectively.

       While Budget 2022 may have the largest allocation for expenditure on record for the country, this has failed to excite the market.

       This could be due to the new tax regime proposed by the government in Budget 2022, coupled with the absence of major infrastructure projects in the said budget.

       Last Friday, the government announced a total of RM332bil allocation for Budget 2022, comprising RM233.5bil for operating expenditure, RM75.6bil in development expenditure and RM23bil for the Covid-19 fund.

       The government also proposed a one-off windfall tax called Cukai Makmur, and higher stamp duty for stock trading on Bursa Malaysia, to raise its revenue.

       Under the Cukai Makmur, companies that churn more than RM100mil in annual income will be taxed 33% in 2022, from the current 24% tax rate.

       In addition, the government ？？will remove the RM200 stamp duty cap and increase the stamp duty rate to 0.15% from 0.1% for stock trading.

       On Monday, the FBM KLCI, which is a gauge of the 30 biggest companies on Bursa Malaysia, dipped by 2.2% or RM34bil of market capitalisation.

       Negative growth for corporate earnings in 2022

       Several research houses have cut their forecasts on corporate earnings and the FBM KLCI performance.

       “The biggest surprise for us in Budget 2022 was the introduction of the one-off special windfall tax,” says CGS-CIMB Research head of Malaysia research, Ivy Ng, in a report.

       She expects corporate earnings to decline by 6% in 2022 due to this, compared with her earlier forecast of a 0.5% growth in earnings.

       “Also, there could be downside risk to 2022 earnings if companies decide to front-load expenses, delay progress billings and income recognition or raise provisions to lower their tax expenses.

       “Some companies could reduce dividend payouts due to the higher taxes,” she says.

       She adds that the research house has cut its year-end 2021 FBM KLCI target to 1,521 points from 1,629.

       Meanwhile, Maybank head of Malaysia and regional equity research Anand Pathmakanthan says it has cut its end-2021 FBM KLCI target to 1,530 points from 1,720 previously.

       “Corporate earnings for FBM KLCI will be negative again in 2022.

       “Which is really strange, given that the economy is recovering and expected to grow by 6% in 2022, but capital market earnings will be negative because of this tax,” he said at Maybank’s post-budget webinar on Wednesday.

       He expects a total of 240 companies to be affected by the one-off Cukai Makmur, and there could be lower dividend payments by companies in 2022 due to higher tax rate.

       However, he expects the market to rebound significantly at end-2022 to 1,710 points as corporate earnings are expected to see double-digit growth in 2023.

       An analyst points out that the government could have raised higher revenue from the Cukai Makmur tax if it was implemented last year. This is due to the bumper earnings that glove makers made that year.

       “For instance, from Top Glove Corp Bhd alone, the government could have collected more than RM3bil based on its pre-tax income of RM10.4bil for the financial year ended Aug 31, 2021,” the analyst says.

       Higher cost to trade stocks in 2022

       For many years, Bursa Malaysia has experienced low retail participation in the stock market. That was until 2020 when the Covid-19 pandemic hit.

       According to data from the Securities Commission, retail investors bought RM14.3bil worth of stocks in 2020, surpassing the RM10.3bil by local institutional investors.

       The higher stamp duty for stock trading that is being proposed by the government could soften the trading activities of both retail and institutional investors.

       “Retail trading participation on Bursa Malaysia has stood above 30% since the onset of the pandemic. This figure will inevitably decline greatly in 2022 with the removal of the stamp duty cap,” an observer says.

       The RM200 stamp duty limit was introduced in 2003 to boost the capital market in Malaysia.

       Ng of CGS-CIMB says that the higher transaction cost for stock trading could push high-volume stock market traders to venture into other stock exchanges with lower transaction costs.

       “This is likely to be negative for stockbrokers in Malaysia and Bursa Malaysia,” she adds.

       On the contrary, former investment banker Ian Yoong points out that the higher transaction costs in buying and selling shares will not be a “major deterrent” to retail and institutional investors.

       “A vibrant stock market where there are many opportunities to profit is more compelling than attractive transaction costs but few opportunities to profit.

       “The marginal increase in transaction costs is a clever way to bump up government coffers,” he adds.

       However, he says the impact of higher stamp duty will be significant for high frequency and proprietary or “prop” traders.

       “High frequency and prop traders could buy and sell the same stock many times in a day at razor thin brokerage rates.

       “Some of them have bought and sold the same stocks eight to 10 times in a day when the stock market was euphoric in 2020.

       “They operate under a veil of secrecy and are driven by algorithms. Now they may be hindered from doing so due to the rise in trading fees,” Yoong explains.

       Another country that has recently raised its stamp duty for stock trading to shore up the government’s revenue is Hong Kong – from 0.1% to 0.13% in February this year.

       This had sparked a massive sell-off in the market of US$7.6 trillion (RM31.6 trillion), its biggest plunge (2.9%) in more than five years.

       It should be noted that prior to the Budget 2022 announcement last week, there had been calls to impose a capital gains tax, which would have hit gains from the stock market.

       If that had been proposed, it is likely that the stock market’s performance would be much worse than it is now.