Investors, stay calm

It is unlikely for Malaysian equities to have a strong rebound in the near term before more clarification from GE15’s outcome

by IFAST RESEARCH TEAM / pic BLOOMBERG

PRIME Minister Datuk Seri Ismail Sabri Yaakob announced the dissolution of Parliament on Oct 10, 2022. The declaration comes amid rumours of a quick election and just days after the national budget for 2023 was tabled. Legally, the General Election 2015 (GE15) must be held within 60 days of the dissolution of Parliament.

As of the time of writing (Oct 12, 2022), we are still waiting for the announcement from the Election Commission regarding the exact date of Nomination Date and Polling Date. Based on historical data since 2000, the process from the Parliament dissolution date to the polling date is likely to take 17-32 days, hence the market is likely to reflect near-term uncertainties with weaker performance.

What to Watch For GE15

Instead of a head-to-head battle between Barisan Nasional (BN) and Pakatan Harapan (PH) like what we have seen in GE14, we are going to witness several three (or more) corner battles. This is mainly due to BN, PAS and Perikatan Nasional (PN) appearing to be competing on their own — hence, against each other despite having formed administrations following the PH government. With a fractured Opposition camp, the GE15 outcome is more unpredictable as more political coalitions will emerge if any of these parties do not achieve a high majority of seats.

Followed by two constitutional amendments last year which are Undi18 which lowered the minimum voting age from 21 to 18 and automatic voters’ registration, we expect the turnout rate from these new voters likely to be one of the critical segments for political parties to compete.

With three major political blocks — BN, PH and PN — joining the fight, we think it is tough for any of these parties to secure a simple majority of Parliament seats by itself. Hence, we believe that more political coalitions could be formed in order to rule the country with majority seats.

Impact on Budget 2023

Will the upcoming GE15 bring a material impact to Budget 2023 which was just announced days ago?

Regardless of which party (or coalition) won the majority seats, we are expecting no significant changes in the Budget 2023. In terms of government expenditure, we believe the goodies and tax deductions will remain the same as it is tough for the government to abolish these incentives. Nevertheless, we anticipate the assistance is going to switch from blanket subsidies to more targeted subsidies to minimise the widening fiscal deficit.

Meanwhile, we think the major ongoing infrastructure project including Mass Rapid Transit Line 3, Pan-Borneo Highway and East Coast Rail Link is here to stay. However, a decisive win by the BN-led alliance could potentially see a revival of the Singapore-Kuala Lumpur high-speed rail project and related Bandar Malaysia development. In terms of digitalisation transformation, any government to be formed after GE15 will no doubt continue these efforts given the technology disruptions across the sectors.

Even if we think that the likelihood for considerable changes in expenditure in Budget 2023 is minimum, any new tax introductions such as windfall tax or Goods and Services Tax could play as a wildcard.

Fundamental Remains Intact

FTSE Bursa Malaysia KLCI’s (FBM KLCI) fundamental remains intact despite the recent sell-off. From our point of view, the market will take a conservative approach at this juncture given GE15’s unpredictability. Hence, given the macro backdrop, we conclude that it is unlikely for Malaysian equities to have a strong rebound in the near term before more clarification from GE15 outcome.

(see Figure 2) is a testament of a strong buying interest of foreign investors in the domestic equity market.

Thus, instead of being spooked by the upcoming GE15, we advocate investors to be calm given that more certainties are going to come in after the GE15 as it provides more political stability, unlike what we have experienced in the past two years.

Despite the near-term turbulence caused by political uncertainties, Malaysia’s corporate earnings still show a resilient fundamental (as shown in Table 3). Generally, the share price and EPS are positively correlated, as such, in our opinion, the recent drawdown is much sentiment-driven, proven by the divergence between the share price and forward EPS of FBM KLCI, see Figure 3.

Among the Malaysian sector, we prefer Financial, Consumer Staples and REITs as these sectors play a defensive role amidst the volatility and provide buffers for investors to avoid unexpected drawdowns. All in all, we advocate investors, again, to focus on companies’ fundamentals instead of being influenced by these market nuisances.

The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.