FBM KLCI in the red on political turmoil

The benchmark index fell 41 points to 1,490, a 99-month low as political parties sought to form a new govt in Putrajaya yesterday


MALAYSIA’S equity market slumped and the ringgit tumbled with the resignation of the prime minister (PM) as political upheaval in Putrajaya led investors to take a risk-off approach amid the spread of the Covid-19 hitting sentiment on global markets.

The benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) fell 41 points or 2.7% to 1,490, a 99-month low as political parties sought to form a new government in Putrajaya yesterday.

The losses yesterday took the index 98.7 points or 6.21% lower year-to-date from its 1,588.76 close on Dec 31, 2019.

The political development sent the ringgit to close at a 25-month low of 4.224 against the US dollar as the Pakatan Harapan (PH) government saw the exit of Parti Pribumi Bersatu Malaysia and factions from the PKR.

Tun Dr Mahathir Mohamad was appointed interim PM by the King late yesterday evening as the rival coalition parties sought to form the new government.

“It’s a sell signal, the current situation will likely mean that there will be horse-trading going on and that may be more likely to boost spending rather than fiscal prudence and, perhaps, the risk here is for more massive deficits. But the more parties involved, the more complicated the horse-trading is,” AxiTrader Ltd chief strategist Stephen Innes noted yesterday on the ringgit in light of the political turmoil in Putrajaya.

Bank Negara Malaysia (BNM) in a statement yesterday said it is monitoring conditions in the financial markets as analysts fear further weakness as global markets fear the spread of the Covid-19 will impact global economic health.

“While ringgit movements will continue to be market determined, BNM’s market operations will ensure sufficient liquidity and orderly financial market conditions,” the central bank stated.

Pheim Asset Management Sdn Bhd CEO and CIO Leong Hoe Kit said given the current global situation with Covid-19 and the domestic political turmoil, the local capital market and the ringgit could see some relief from the apppointment of Dr Mahathir as interim PM, but fundamentally continue to face tremendous downward pressure.

“I think there will be a little bit of recovery for the FBM KLCI and ringgit as it will provide a little bit of stability until further developments arise and more clarity comes out of the picture. As it stands, it will put things in limbo a little bit,” he said.

In the short term, he said it would not be easy for both the capital market and the ringgit to stem the tide as the repercussions could be far and wide reaching.

“Hopefully the bellwether KLCI and the ringgit will not lose more than 10% than where it currently stands at the moment,” he told The Malaysian Reserve yesterday.

The local market saw losers beating gainers by 1,015 to 138, while 222 unchanged and 624 untraded yesterday.

Among the heavyweights on Bursa Malaysia, Kuala Lumpur Kepong Bhd slipped 4.31% or RM1 to RM22.20, Public Bank Bhd lost 4.08% or 74 sen to RM17.40 with glove maker Top Glove Corp Bhd bucking the trend by rising 2.84% or 15 sen to RM5.44.

Leong added that investors are well advised to stay sidelined for the moment given the prevailing uncertainties, but should stay alert to recognise and capitalise on any value opportunities that may emerge during any “low tide” moment in the current environment.

UOB Kay Hian Malaysia Research in a note yesterday said while talks of a new coalition may send the FBM KLCI to new lows amid great uncertainties to the country’s long-term politics and policies, the firm also identify winners of the potential change in landscape — namely Gabungan AQRS Bhd (GAQRS), MyEG Services Bhd and Cahya Mata Sarawak Bhd (CMS).

The firm added that potential beneficiaries in the formation of a backdoor ruling coalition include selected construction companies like GAQRS and CMS, and building material companies (notably cement company Hume Industries Bhd) and MyEG. Exporters should also generally benefit from the weaker ringgit.

Potential losers could be selected sin stocks, in particular numbers forecast operator and brewery (presumably the inclusion of PAS into the coalition) stocks and Gamuda Bhd, which is undertaking the Penang Transport Master Plan, UOB Kay Hian Research added.

The firm advised a highly defensive stance as equities are expected to underperform in the near term.

Its top picks are mostly export-oriented and largely unaffected by potential changes to domestic policies.

These include IOI Corp Bhd, MISC Bhd, Sunway Bhd, Westports Holdings Bhd and Yinson Holdings Bhd and small/mid caps like Duopharma Biotech Bhd, IJM Plantations Bhd, Hume Industries, Scientex Bhd and VS Industry Bhd.

UOB lowered its FBM KLCI valuation to 1,480 based on 15 times 2020F price-to-earnings (PE).

“We will be reviewing our current end-2020 FBM KLCI target of 1,650, which pegs the market at 16.8 times 2020F PE, to adequately incorporate the impact of Covid-19 on market earnings and assess the country’s political and policy landscape,” it said.

UOB also noted that market’s subsequent reaction will depend on business policies adopted.

The firm added that scenario of a new ruling coalition should be uplifting for a handful of stocks by unlocking some of PH government’s policy implementation such as expediting the implementation constipation of the already approved mega construction projects and thawing the hiring of foreign workers.