MOST candidates for Malaysia’s 222 parliamentary seats were announced last week ahead of polling day on Nov 19. But unlike in previous elections, trading in politically linked stocks has been muted since the dissolution of parliament on Oct 10. Industry observers believe the lack of action is due to uncertainty over the outcome of the 15th general election (GE15).
“In the past, when getting closer to the election, there would be buying interest in some election stocks. But this time around, there is little interest in them, as investors do not have a clear picture of the potential winner.
“If you had asked me six to 12 months ago — shortly after the state elections in Johor and Melaka when BN (Barisan Nasional) won with quite convincing majorities, the sentiment was very much on the BN side. But now, it seems to have come down a lot,” the head of a bank-backed research house tells The Edge.
“The ideal outcome is BN winning with a simple majority, which will bring back a climate of certainty. Looking at the current situation, even should BN win the most seats, people doubt whether it can reach the 50% mid-point after forming a partnership with other parties.”
He adds that a no-confidence vote could be called in the event of a weak majority in parliament.
Having said that, he notes that the election outcome may surprise in view of the lowering of the voting age to 18 from 21.
No single party is expected to command a majority to form a new government, according to political analysts. The election outcome is likely to be unpredictable, with Malay votes split between the three major coalitions, namely BN, Perikatan Nasional and Pakatan Harapan.
Others are more confident of a BN victory. Taking a cue from the results of several by-elections and three state elections since GE14 in 2018, UOB KayHian is of the view that an Umno-led coalition will gain a comfortable majority in parliament, with GE15 being a minor influence — neutral to mildly positive — on local equities amid expectations of political stability.
The research house, in an Oct 19 note, says market sentiment will continue to be significantly swayed by many external headwinds, such as US monetary tightening, the ongoing Russia-Ukraine war and China’s zero-Covid policy.
The head of another research house says many companies are distancing themselves from being perceived as politically linked, hence the lack of buying interest in so-called election stocks.
He agrees that an early election will help clear market uncertainty. “Some people may not like an early election, but it should take place sooner than later.”
Plantation firm Matang Bhd has seen the largest gain of 11.8% since the dissolution of parliament, followed by Jiankun International Bhd (+6.4%), Datasonic Group Bhd (+5.6%), and Pecca Group Bhd (+2.9%).
Matang Bhd is 17.15%-owned by the Malaysian Chinese Association (MCA), which is part of the BN coalition. Not too long ago, MCA emerged as a substantial shareholder of Pecca Group, the manufacturer of leather upholstery for cars, holding a 6.33% indirect stake via its investment vehicle, Huaren Holdings Sdn Bhd. MCA also has direct and indirect stakes of 43.23% and 0.675% respectively in Star Media Group Bhd.
Another media stock that is in focus is Media Prima Bhd, which is linked to businessman and politician Datuk Seri Johari Abdul Ghani, who owns a 20.08% stake through Jag Capital Holdings Sdn Bhd. He was the second finance minister from 2016 to 2018.
It is worth noting that media stocks are seen as beneficiaries of a general election because they are expected to gain from an increase in advertising revenue as political parties ramp up their campaigns.
Interestingly, while Star Media has risen 5.4% since parliament was dissolved, Media Prima has decreased 2.3%.
Property developer Jiankun International came under the spotlight in August after former deputy prime minister Datuk Seri Ahmad Zahid Hamidi’s son-in-law Datuk Saiful Nizam Mohd Yusoff emerged as a substantial shareholder with an 8.58% interest.
Perceived as a BN stock, MyEG Services Bhd has declined 2.4% over the same period.
So far, the broader market has been holding well since the dissolution of parliament. The benchmark FBM KLCI Index has gained 3.2% while the FBM Emas Index, FBM ACE Index and FBM Small Cap Index are up 2.5%, 5.2% and 3.5% respectively.
As the local market’s valuation remains attractive, the head of the bank-backed research house believes that the FBM KLCI could be well supported at 1,400-1,450 points. “Chances are that there will be value picking again after the election,” he observes.
In an Oct 11 note, Kenanga Research says that there could be three scenarios for the broad outcome of GE15, namely a majority government, a minority government or a hung parliament.
“We expect the market to rally on the emergence of a majority government, which we believe is where the market has stacked the odds at present. On the flip side, if the scenario fails to play out, market sentiment could be significantly dampened.”
The research house advocates that investors seek refuge in banks, telcos, auto makers/distributors, mid-market retailers and construction as it believes the government of the day, post-GE15, will continue to be highly supportive of domestic consumption.
Kenny Yee, head of research at Rakuten Trade, believes the political climate — rather than rising interest rates — has a more pronounced impact on the stock market. “We know that US rate hikes may come to an end anytime soon. A potential slowdown in the US economy will push some funds out of Wall Street and to Asia. Certainly, politics plays a more prominent role.”
Despite the lacklustre performance, he stresses that overall fundamentals remain decent, and recommends stock accumulation at low prices. “Nothing has drastically changed. There are still a lot of undervalued stocks based on historical valuations. With the window-dressing period approaching, there could be some activity there.
“I foresee more project awards trickling in for the construction sector, and Gamuda Bhd and IJM Corp Bhd are among the good names. Apart from that, banking and telco stocks are also worth a look. With more clarity on 5G, the telco sector should regain some interest.”
Foreign fund flows impacted by rate hike cycle
Given the political instability and continued US rate hikes, how will foreign funds react?
After four weeks of net outflows, foreign funds bought RM292.67 million of Malaysian equities last week, from a net sale of RM68.22 million in the previous week, according to MIDF Research.
International funds have been net buyers for 25 out of the past 43 weeks of the year, with a total net inflow of RM6.03 billion. Local institutions, however, were net sellers for 30 weeks, with a total net outflow of RM8.16 billion. Having registered a net buying of RM2.12 billion, local retail investors have been net buyers for 27 out of the 43 weeks.
Yee projects that foreign funds will return towards the year end when the US’ rate hike cycle stabilises. “Interest rates are still playing a large part in fund flows. Actually, the rate hikes have been priced in, so it’s just about the quantum of the hikes. When interest rates increase, there will be an impact on the stock market.”
Similarly, the head of the bank-backed research house expects foreign funds to flow back to the Malaysian market when the US dollar weakens. “By end-March or April, that would be the time when the US fed funds’ terminal rate will be reached, signalling that the aggressive rate hike will come off in the early part of next year. But if US inflation and economic strength continue to surprise on the upside till January next year, then it will be a concern.”
Last Wednesday, the US Fed delivered another rate hike of 75 basis points to push its key rate to 3.75%-4%, but signalled that smaller rate hikes may be on the horizon. This is the fourth straight increase of the same magnitude amid elevated inflation.