What’s next for the stock market with new PM?

Weakening of the US dollar may progressively attract foreign funds into the region and Malaysia in particular

by RUPINDER SINGH / pic TMR

ANALYSTS have raised their respective year-end target for the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI), following the end of the political impasse with the swearing-in of Datuk Seri Anwar Ibrahim as Malaysia’s 10th prime minister (PM10) on Nov 24.

After a five-day wait following the 15th General Election (GE15) that produced a hung Parliament, the Pakatan Harapan (PH) chairman was sworn in as the executive leader of the country under a unity coalition — nearly 25 years after he was sacked as deputy PM by then-PM Tun Dr Mahathir Mohamad in 1998.

The news quickly saw both domestic and international investors immediately jumping into Malaysian assets.

The FBM KLCI Index rallied last Thursday as the political gridlock eased, lifting domestic sentiment to the highest daily gain in 32 months. At day’s end, the benchmark index rose 58.38 points, or 4.04%, to 1,501.88, with advances led by Axiata Group Bhd, Maxis Bhd, Top Glove Corp Bhd and Inari Amerton Bhd.

Market breadth turned positive with gainers overwhelmingly outnumbering losers by 981 to 197, with a massive 6.86 billion shares valued at RM4.19 billion changing hands.

At the same time, the ringgit jumped 815 percentage points to RM4.49 against the US dollar — the first time the local currency appreciated below the psychological level of RM4.50. Under Datuk Seri Ismail Sabri Yaakob’s government, it plunged to as low as RM4.75.

For analysts and market watchers, the political-impasse resolution is certainly a positive outcome. Investors will now be looking out for the re-tabling of Budget 2023, which could possibly include some of the GE15 manifesto pledges by coalitions of this unity government.

Breaching 1,800

With near-term political risk having eased, CGS-CIMB Securities Sdn Bhd raised its end-2022 FBM KLCI target to 1,602 points from 1,484 points. In fact, the research house said Bursa Malaysia’s barometer index could even hit 1,885 points if the political instability concerns ease over time.

“We raise our end-2022F KLCI target to 1,602 points (which is a 12-month forward P/E [price to earnings ratio] of 13.8x or 1.5sd from its historical three-year moving average mean P/E) from 1,484 pts (2.5sd below its three- year average mean P/E) to reflect the resolution of the hung Parliament.

“If the concerns of political instability ease over time, there is potential for the FBM KLCI to revert to its pre-GE14 valuations of 16.5 times, which is closer to the three-year average mean P/E of 16 times and values the FBM KLCI at 1,855 points,“ it said in a report last Friday.

It noted that Istana Negara’s announcement on Nov 24 was a positive for sin stocks as concerns over regulatory risks dissipate.

Gaming companies (Genting Malaysia Bhd, Genting Bhd, Magnum Bhd and Berjaya Sports Toto Bhd) and brewers (Carls- berg Brewery Malaysia Bhd and Heineken Malaysia Bhd) saw their respective share prices jump on a relief rally.

To recap, sin stocks had fallen significantly in the first trading day after GE15 due to concerns that should the Tan Sri Muhyiddin Yassin-led Perikatan Nasional (PN) coalition form the federal government, with PAS as a major partner, restrictions could be imposed on gaming and brewery companies.

CGS-CIMB believes healthcare stocks or pharmaceutical companies should do well as the PH manifesto mentioned an increase in healthcare expenditure to more than 5% of GDP, which will be positive for pharmaceutical companies.

Its top picks following the appointment of the new PM are the consumers sector (MR DIY Group (M) Bhd, QL Resources Bhd, Kawan Food Bhd), banks (RHB Bank Bhd, Hong Leong Bank Bhd and Public Bank Bhd), gaming (Genting, Genting Malaysia, Magnum and Sports Toto) and brewers (Carlsberg and Heineken).

It also said that the construction (Gamuda Bhd, HSS Engineers Bhd), telco (Telekom Malaysia Bhd), utilities (Tenaga Nasional Bhd) and property (Sime Darby Property Bhd) sectors could also do well in a more stable political environment.

However, the research firm said pending more details on the structure of the unity government, there could be lingering concerns over the fragility of potential alliances due to their differing ideologies.

It pointed out that the market will be closely watching several key dates moving forward, notably the announcement of the Cabinet lineup which it estimates could take seven to 10 days; first sitting in Parliament on Dec 19; tabling of provisional and full Budget 2023; Umno party elections (six months after GE15); and finally state elections in Penang, Selangor, Negri Sembilan, Kelantan, Terengganu and Kedah in 2023.

External Factors

MIDF Research, which raised its year-end FBM KLCI target to 1,550 points from 1,520 points, said although the market was particularly buoyant on Nov 24, it believes that external factors also played a key role in the performance of the FBM KLCI as the US Federal Reserve (Fed) is expected to reduce the pace of its rate increase from 75 basis points (bps) previously to 50bps in December.

“This is based on FOMC (Federal Open Market Committee) meeting minutes whereby FOMC members concluded earlier this month that the US Fed needs to moderate the pace of interest rate hikes soon to reduce the risk of excessive tightening. This followed encouraging performance of regional stock markets as well,“ it noted.

In addition, it opined that the resolution of the domestic political situation was also another factor that worked in tandem with external factors. This, it said, had removed an uncertainty in the market.

MIDF Research also observed that the FBM KLCI has been resilient since GE15 despite the uncertain political situation, as it only fell 0.4% (by 5.82 points) since Nov 17, 2022 (prior to the election), until Nov 23, 2022.

Going forward, following the jubilant rally post-PM10 announcement, MIDF Research expects investors’ attention to revert outward in short order.

It said that the weakening of the US dollar against most currencies including the ringgit since earlier this month, in view of the impending Fed pivot, may progressively attract foreign funds into the region and Malaysia in particular.

MIDF Research also believes the new PH-led government would introduce some changes or re-alignments to the existing economic policies and programs according to its manifesto. Nevertheless, it said the impact on the macroeconomy and corporate earnings may manifest mostly over the medium to longer term.

How sectors will perform after this

Consumer sector a clear winner.

MIDF Research said the various assistance promised in the PH manifesto, including continuing the allocation of Bantuan Sara Hidup (BSH) programme, childcare subsidies and RM100 of Jom Shopping vouchers for the elderly, would increase consumer spending on essential items.

“We think that consumer staples with household brand names are expected to be the big winner from the various subsidies introduced. Meanwhile, we opine that only selected consumer discretionary companies will benefit, notably retailers like Aeon Co (M) Bhd,” it said.

Production incentives.

MIDF Research noted that providing ample incentives to increase the production of food and basic essentials is a long-term solution to alleviate market pressures caused by rising prices.

With higher production, it said that costs can be brought down and offering enough incentives to boost staple food production will benefit poultry companies. Meanwhile, it noted that export-oriented consumer companies would benefit from export incentives.

Sarawak and Sabah.

Under the manifesto blueprint of PH, it said that the two states are expected to benefit via receiving more economic incentives in order to reduce unemployment rates, improve basic infrastructure facilities, as well as ensure the Malaysia Agreement 1963 is implemented and provide autonomy power to the state governments on health and education sectors.

In addition, it noted that PH proposes to promote greater international trade activities in Sabah, particularly by giving a free trade zone status to Kota Kinabalu Industrial Park (KKIP), POIC Lahad Datu and Sipitang Oil & Gas Industrial Park (SOGIP).

“We believe that this will benefit the state’s power generators from higher potential electricity demand and therefore, higher dispatch, ie a Sabah-based utility player. It will also benefit the oil and gas sector as well,” according to the report.

Sarawak and Sabah-based construction sector to benefit.

Part of PH’s manifesto includes the upgrading of basic infrastructure such as water, electricity, sewerage systems and roads in all industrial parks in the peninsula and also in Sabah. MIDF Research also believes that road infrastructure works may spread to Sarawak although it is not specifically mentioned in the manifesto, as the state requires about 7,530km of new roads while 3,487km need upgrading.

The beneficiaries for such development in Sarawak, it said, would be Cahya Mata Sarawak Bhd, being the sole cement supplier in the state and which is also involved in construction, and also KKB Engineering Bhd.

More prudent development expenditure.

Though not stated explicitly in the manifesto, MIDF Research expects PH to be more prudent in their expenditure for development and infrastructure projects. This, it said, may result in a potential review of plans that are already in the pipeline, which could delay its execution progress or termination, such as what was seen after 2018.

However, it expects the upcoming mass rapid transit 3 (MRT3) to go on, as it is the crucial final piece to complete Kuala Lumpur’s urban rail network and the key mega project to give the construction sector a boost.

It also noted that the telecommunication sector might see prolonged uncertainty on 5G since PH, being the Opposition previously, had once raised concerns on the risk of implementing 5G via Digital Nasional Bhd in terms of cost, transparency and governance. It said that if PH was to divert from the single wholesale network (SWN) model, to either allow Dual Wholesale Network (DWN) or individual deployment by the mobile network operators (MNOs), it will negatively impact the telco sector, given the prolonged uncertainty on the 5G rollout plan, and pose reputational risk to the government.

Glove sector downgraded.

MIDF Research said all glove companies under its coverage will be impacted by the minimum wage policy, due to their labour-intensive businesses. However, the impact is manageable as implementing the increase in a systematic strategy over time will help companies to better prepare for the output raise.

Also, the effort in integrating automation in their plants to reduce their reliance on workers will indirectly reduce the impact. This should offset the fundamental weakness the sector is facing at the moment.