KUALA LUMPUR, Jan 11 ― HSBC expects the economic recovery in Malaysia to be quite strong this year, with the gross domestic product (GDP) set to expand 5.6 per cent despite the impact of the recent floods in the country.

James Cheo, chief investment officer for Southeast Asia at HSBC Global Private Banking and Wealth, said key drivers to the nation’s growth would be a higher consumption level, an influx of infrastructure spending that has been on hold for the last two years, as well as buoyant foreign direct investment.

He also believes that many companies would resume their expansion activities this year as their plans had been held back the last two years due to the pandemic.

“It’s very likely that this year will be the year in which companies will start to invest and grow their operations, especially with the huge long term prospects for Southeast Asia,” he said today during a virtual media briefing on HSBC's Investment Outlook 2022. “I think the pillar of growth for Malaysia is going to be largely consumption, investment, and support from the manufacturing sector which will still be very robust.”

Cheo expects the inflationary pressure to be a little bit lower this year, at around 2.1 per cent, and that would lead to Bank Negara Malaysia being very gradual in its tightening monetary stance in the second half of the year.

“Perhaps they are looking at 50 basis points increase (in the overnight policy rate) this year,” he said, adding that the central bank could have policy buffer in light of Omicron.

He said the fiscal policy would likely remain expansionary in 2022 with a budget deficit target of 6.0 per cent of GDP, compared with a targeted deficit of 6.5 per cent in 2021.

On the external front, Fan Cheuk Wan, the bank’s managing director and chief investment officer, expects global economic growth and earnings to moderate but remain respectable in the mid-cycle phase this year.

She said global interest rates should remain well below normal despite faster tapering and rate hikes by the US Federal Reserve (US Fed), extending the “low but volatile” rate environment.

“We expect that inflation will come down some time in 2022 and the five rate hikes that we expect from the US Fed between March 2022 and September 2023 are still slower than what we have seen in the previous US tightening cycles,” she said. “This should remain supportive of our risk-on strategy with overweight allocation to global equities and preference for US, European and Asian equities.”

Meanwhile, Cheo said Southeast Asia (SEA) is expected to experience a growth spurt, growing by 5.2 per cent this year compared with a mere 3.6 per cent last year and this would boost company earnings growth to 12.3 per cent.

“The game changer for SEA is the implementation of the Regional Comprehensive Economic Partnership (RCEP), the world‘s largest free trade agreement, which will bring deeper trade and investment integration for the region.

“With the reopening of the borders, consumption for SEA is expected to recover strongly this year with tourism the wild card. Investors should not ignore Southeast Asia in 2022,” he said. ― Bernama