Post GE-15 ‘sin’ stock hangover

Genting Malaysia employs over 9,000 people. Losing their jobs would mean losing their source of income, resulting in a drop in the economy’s demand (pic source: gentingmalaysia.com)

We believe that an outright ban is unlikely because of the amount of economic benefit these industries bring to the country

by IFAST RESEARCH TEAM

FOLLOWING a pandemic, years of political turmoil and the conviction of a former prime minister, Malaysians headed to the polls for the 15th General Election. For many, especially those under the age of 21, this will mark their first time voting in an election. As a nation watched the results trickle in, many were stunned to be greeted with no outright winner. During the ongoing negotiations for the new government, the market saw a decline in the prices of so-called “sin” stocks.

On Nov 21, 2022, casino stocks Genting Bhd and Genting Malaysia Bhd opened -9.6% and -10.7% down respectively whereas alcohol stocks Carlsberg Brewery Malaysia Bhd and Heineken Malaysia Bhd lost as much as -5.8% and -6.1% respectively. Number forecasters Sports Toto Bhd and Magnum Bhd retraced as much as -9.1% and -9.4% respectively.

So, what are ‘sin’ stocks? These are stocks of companies that engage in what could be considered sinful activities such as gambling and the production of alcohol. Establishments in the former include casinos and lotteries, with an example being Genting group. The latter includes beer companies such as Heineken. Given that any argument presented would be pure speculation, we would like to be fair and present both a scenario where a ban would be passed on these activities, as well as one where a ban does not occur.

Starting with the latter, we believe that an outright ban is unlikely because of the amount of economic benefit the industry brings to the country. Firstly, the industry contributes a significant amount of tax revenue (RM5.86 billion in 2017) that is spent in the government budget on a discretionary basis. Alcohol is taxed at 15%, with both gambling establishments and those who serve alcohol needing to get their respective licences in order to carry out their business.

Second, these industries employ a large number of people, with over 9,000 people employed by Genting Malaysia alone. This is income that’s taxed and spent on other sectors in the economy. Losing all these jobs would mean a large portion of people losing their source of income, resulting in a massive decrease in the economy’s aggregate demand. Third, a ban on these activities would also lead to a decreased spending overall, as people now have less avenues to spend their disposable income. Additionally, we would also lose out on a portion of tourism income as those who visit for these activities would now have less of an incentive to visit the country.

If the government does decide to go ahead with the ban in spite of the economic ramifications, I’d argue that they would still have to consider the resulting public outcry. With such a massive change in policy, people would be compelled to take action due to the effects it has on their daily lives. This is in addition to the dissatisfaction caused by the layoffs in the industry. Because of this, we think that an outright ban on the activities, at least in the short term, is unlikely.

Even if there is no significant change in policy direction, we believe that sentiments around this industry have already begun to shift. Merely the possibility of a ban is enough to scare away investors due to the perceived increase in risk that are associated with a change in governmental tone. The result being a stagnation in this sector, causing outlooks to sour. In this case, we see companies like Genting looking outward and expanding to other regions if they have a capability. Their regional businesses are likely shifting towards other forms of entertainment such as theme parks.

Due to the unpredictable nature of closed-door negotiations, all this is merely speculation as to what the future of our governance holds. While these outlined scenarios are possible, we have to again emphasise that they are hypothetical. That being said, for those who are particularly risk averse, we would recommend that you divest your holdings in companies that are involved in this field over time and look for better investment opportunities elsewhere.

The views expressed are of the research team and do not necessarily reflect the stand of TMR.