Pic by MUHD AMIN NAHARUL
THE 14th General Election (GE14) in Malaysia is around the corner as the Parliament will automatically dissolve latest by June 2018, which means the latest date for the polls will be August 2018.
Predicting the date for the local election is an extremely tough task. One of the biggest misperceptions about the GE in Malaysia is that the event will cause heightened political uncertainty.
This misperception is due to the emergence of social media that has enabled faster flow of news, information and rumours. Subsequently, one might be flooded with tons of information that could not be digested.
If we analyse the impact of political events in Malaysia from a foreign investor’s perspective, Malaysia is considered a country with a stable political outlook. The reason being, for the past 60 years, Malaysia has been governed by a single political party.
On top of that, given the ameliorating economic outlook with improving consumer sentiment, as well as business confidence and the current fragmented Opposition, there is still a high possibility for Barisan Nasional (the current ruling party) to extend its 60 years-long grip on power in the coming GE14.
Our findings show, on average, market volatility tends to be higher during election year with higher standard deviation compared to a non-election year.
One reason is due to the overreaction of investors that subsequently led to more trading in the equity market. Volatility aside, the local equity market has trended higher after the election. There’s an 88% chance the local equity market posts positive returns one year after an election.
Over the past 39 years, on average, the equity market posted one-year post-election return of 18%.
We also want to highlight the negative post-election return in 2008. We believe the local equity market was more affected by the spillover effects from the 2007-2008 subprime crisis in the US, rather than the local political conditions.
By combining the data from market volatility and market return, we can conclude the local equity market tends to be more volatile during election year, and on average, moving up after the election.
Hence, any fall in the local equity market prior to elections, due to a political factor and without any changes in the fundamental of the economy, would be a great opportunity for investors to take position in the equity market.
Over a longer-term perspective, the few key forces that drive the equity market are corporate earnings and fundamentals of the economy, as there’s a strong positive correlation between Malaysia economic growth, corporate earnings and stocks prices.
Historically, we are likely to see a stronger growth in gross domestic product (GDP) during the election year and the subsequent year.
The average GDP growth rate during a non-election year was about 6.12%, whereas during the election year and subsequent year it averaged at 6.88% and 6.35% respectively.
One of the reasons for the acceleration in economic growth during the election year might be due to higher government spending, which then translated into increasing private consumption.
The expansion in government spending and local consumption — together with the accelerating construction and infrastructure projects — contributed to the acceleration in GDP growth during election year.
We are of the view that political factors may have some short-term bearing on the markets, but no long-term impact on the performance of the local stock market, as corporate earnings remain the driver of the equity market.
Hence, we advocate investors pay attention on the fundamentals of the economy, as well as the growth of corporate earnings, and stay invested in the market during an election year instead of taking any speculative position.