This article first appeared in The Edge Financial Daily on May 8, 2018

KUALA LUMPUR: Most analysts and fund managers maintain their view that the most likely outcome of the 14th general election (GE14) is still for the incumbent Barisan Nasional (BN) to retain its simple majority. This is despite nervousness emerging in the local equity market as former Umno leaders and ministers such as Tan Sri Rafidah Aziz and Tun Daim Zainuddin openly support former prime minister and Pakatan Harapan (PH) chairman Tun Dr Mahathir Mohamad’s campaign, giving it a final push before polling day tomorrow.

The FBM KLCI fell by 0.74% or 13.63 points to 1,828.20 points at market close, making it one of the worst performing markets in the region yesterday. The broader market was also in the red as decliners led gainers by 750 to 187 while 362 counters traded unchanged.

The FBM Small Cap Index fell by as much as 1.5% but recovered to close 1.26% lower at 14,392.4 points.

The FBM KLCI-linked put warrants were also among the top gainers, an indication that investors are hedging their bets as uncertainties and noise surrounding the election outcome emerges.

“The market sentiment definitely has changed over the last five days with the investors feeling a bit more uncertain about the election outcomes,” Danny Wong, Areca Capital Sdn Bhd chief executive officer told The Edge Financial Daily.

He said this has created a negative sentiment among investors and that there were more selling activities seen in the last week prior to polling day tomorrow.

“We have definitely seen more investors being cautious about it now that we are getting nearer to it (election day), but we have been seeing some of these positioning in the last one to two weeks already. In fact, we have also shifted into some of the more defensive counters, the bigger caps and those that have been sold down to an attractive level prior to this week,” he added.

Loui Low, head of retail research at Hong Leong Investment Bank Bhd, agreed with Wong that the downtrend is intact at the moment as the technical indicators showed that the FBM KLCI could even fall to 1,800 by the end of today.

The local bourse will be closed on voting day (tomorrow, May 9) as it has been declared a public holiday.

“The short-term trend is moving downwards with the 200-day simple moving average (SMA) at [the] 1,800 level. In yesterday’s morning trade, the FBM KLCI fell to its intraday low of 1,821.79 points, which is slightly above the immediate support level of 1,820.

“If it breached below 1,820, the next support level would be at 1,795 points,” he said.

Just as the sentiment on the ground changed, the stock market saw a swing in movement as well. Stocks seen to be linked to some of the incumbent leaders or projects were hit badly but Opcom Holdings Bhd, whose chairman and chief executive officer is Tan Sri Mokhzani Mahathir, jumped by 11.3% or 4.5 sen to 44.5 sen with 2.3 million shares traded.

On average, the 10 counters that were expected to see a pre-election rally due to the perceived close links to political figures, were down by an average 2.1% yesterday.

Among the counters that were reported as potential counters primed for a pre-election rally in The Edge Malaysia back in January were KUB Malaysia Bhd, Zecon Bhd, DRB-Hicom Bhd, Media Prima Bhd, Destini Group Bhd, Felda Global Ventures Holdings Bhd, George Kent Bhd, MyEG Services Bhd, Excel Force MSC Bhd and Dagang NeXchange Bhd.

An analyst with a local investment bank agreed that the sentiment has changed and that the market is positioning for a potential “Malay tsunami” in GE14.

“All these ex-leaders are coming out in the open to throw their support behind Tun [Dr] Mahathir and this will bring an impact to their grass roots support. It is unheard of for ex-Umno leaders to speak against the government in an opposition’s ceramah. The crowd that they’re drawing are going to be from the Umno strongholds and this might change the outcomes that most of us are expecting,” he said, pointing that if the market enters into an unchartered territory, the FBM KLCI could drop about 5% to 6%.

He noted that the drop will not be far from the 10% required to trigger the circuit breaker, which would halt trading on the stock exchange for a specified period of time.

According to him, as most of the research houses have maintained the status quo as the base-case scenario for GE14, any other election outcome could create selling pressure.

“First, you’ll have the credit rating agencies that will come out and question if the fiscal consolidation path will remain intact. As Pakatan Harapan talks about the removal of GST (goods and services tax), these guys will ask how the new government is going to fill these holes. Then you have the research houses doing their revision. Naturally, people will pull their money out while waiting for more clarity,” he said.

A look at historical data shows that in GE12 (2008), when the opposition denied BN its two-third majority for the first time since the 1969 general election, the stock market fell by 8.3% two weeks after the election.

Nonetheless, it is worth noting that there is no consistent trend showing that the market will fall immediately after an election outcome that favours the opposition. In 2013 (GE13), when BN maintained its simple majority but lost the popular vote for the first time, the FBM KLCI was up 4.4% two weeks after polling day.

Not just GE14 at play

Pong Teng Siew, head of research at Inter-Pacific Research Sdn Bhd, pointed out that there are other factors at play in the stock market and that the external environment has been affecting the local stock market recently.

“I believe that the current downtrend is more than just GE14 at play. What’s at work is also the gradual rise in the US dollar, leading to outflows in the emerging market. The strengthening of the US dollar is beginning to weigh on the emerging market. If you look at last week’s data, you could see that outflow gathering momentum, which led to the weakening of the rupiah and ringgit. There is also the weakness in export growth this year, a potential slowdown in global trade,” Pong said.

At the time of writing, the ringgit has strengthened by 2.52% year to date to 3.9447 against the US dollar but in the last one month, it has weakened by 1.9%.

He also pointed that the margin of possibility on the election outcome continues to favour the incumbent or BN.

“While the ceramah attracts a strong crowd in the urban areas, things might not be the same in the rural areas. The fact is that, in the rural areas, there is not a need for such a large crowd to win seats,” he added.

Pong, however, said he does not expect a relief rally post-GE14 as the market will likely be affected by the external environment, which could see further outflow with the strengthening of the US dollar. Another analyst agreed, saying uncertainties over the trade talks between US and China will be a key factor affecting the stock market.

“If anything, the trade talks have highlighted that there are so many differences between the two largest economies in the world,” he said.

Not everyone agrees that the market will continue in a downtrend though. While Wong from Areca Capital believes that a short-term knee-jerk reaction is expected if the incumbent fails to retain control of the federal government, the outlook for the stock market in the long-run remains positive.

He pointed that a decline is expected in an opposition victory but views it as a buying opportunity as the fundamentals and economy for the country remain strong.

He noted that crude oil at the current levels (US$75.50 [RM297.47] yesterday) will be beneficial to the Malaysian economy.

“Whether it is the incumbent or a new government, we remain positive on the stock market. It is possible for us to see a short-term knee-jerk reaction but things will recover as earnings are expected to be better with the US economy continuing to show strength. Once the election is over, there is one less uncertainty as well while a softened trade spat between US and China is also good for the stock market,” Wong said.

Rakuten Trade Sdn Bhd vice-president of research Vincent Lau agreed with Wong on a potential buying opportunity on the back of an unexpected election outcome.

“A knee-jerk reaction, yes, but fundamentally, things remain positive for the stock market,” he said, reiterating his earlier view that the stock market will remain positive for the year regardless of whether the incumbent or opposition win in GE14.