This article first appeared in The Edge Financial Daily on January 2, 2018

As we usher in the New Year after the benchmark FBM KLCI closing in the positive zone in 2017  — the first time in three years, many investors would ponder whether the strong momentum could continue into 2018. The following is the list of factors that could possibly swing the market moving forward:

Malaysia’s GE14

The much anticipated 14th general election (GE14) did not materialise in 2017, will definitely take place in 2018 before Aug 24 this year as the mandate of the ruling Barisan National (BN) coalition will end in June 2018. Analysts have in general expects the GE14 to be the main driver of investors’ sentiment in early 2018 before a return to fundamentals post GE14. So far, most research analysts view that the poll is likely to be in between February and April. The pre-election rally is expected to lift sentiments and improve the “feel-good” factor, which is important for incumbent governments.

The election-play counters, companies that are perceived to have a political favour or have the potential to benefit from a good performance at the ballot box by the incumbents such as Utusan Melayu (M) Bhd, George Kent (M) Bhd and Felda Global Ventures Holdings Bhd, to name a few, would draw some interest from traders and investors.

Of course, just as with everything the upcoming GE14 could also pose a downside risk to the equity market as it might act as a short-term dampener on foreign investors who are wary of political risks. Risks to the equity market also include the outcome of the election, especially since most analysts have not priced in the possibility of an unprecedented victory for the opposition. The return of Malaysia’s longest-serving prime minister, Tun Dr Mahathir Mohamad, to active politics, has definitely added a new variable into the equation.

Should the unexpected happen, investors, both local and foreign alike, will most likely have to revisit the drawing board to evaluate the unchartered territory as BN has ruled since independence. This would lead to an immediate knee-jerk reaction to the stock market.

Price stability in crude oil

The positive outlook and price stability in crude oil are viewed as a positive driver for Malaysia’s economy. The government has factored only a US$52 per barrel crude oil price in its Budget 2018’s revenue assumption. Every addition of US$1 per barrel will add up to RM300 million in government’s revenue and narrow the deficit by two basis points, according to TA Securities.

This is positive from a sovereign credit rating perspective, which could also attract foreign investors into both the domestic equity and bond markets in Malaysia.

The oil and gas companies that are listed on Bursa Malaysia will also benefit from a stronger and more stable oil price in 2018 after a disappointing performance in the last three years for most of the companies. With most of the impairments being done in previous years, some of these companies might return on investors’ radar as the oil price continues to make its climb.

Nonetheless, in Petronas’ report on Activity Outlook 2018-2020, it highlighted three key factors that are critical for oil prices to gain strength. The first one is the compliance by Organization of the Petroleum Exporting Countries (Opec) and non-Opec countries on the output cut accord. The response from US tight oil players is also key to price recovery. It added that the ability to reduce breakeven cost from collaboration with service providers, especially deployment of innovative technology, has sustained the level of tight oil drilling activities in the US.

On the demand side, Petronas highlighted that a sustained healthy global demand growth will facilitate oil stock drawdowns and subsequently hasten global oil market rebalancing. TA Securities also pointed out that Saudi Arabia’s resolve to maintain high crude oil prices may weaken post potential listing of Saudi Aramco in the second half of 2018. Furthermore, a possible fix to US shale players’ shortcomings in boosting supply, such as storage of hydraulic fracking crew and equipment, could limit the upside for oil prices.

Stronger ringgit

The ringgit has make its comeback in 2017 and most research houses expect the trend of a firmer ringgit against the US dollar to continue this year. The local currency is viewed to have been oversold given the prolonged losses in 2014 to 2016. The ringgit is undervalued in view of the supportive fundamentals, a more stable oil price, external reserves rebuilding, sustained trade and current account surpluses, progress in fiscal consolidation, receding foreign holding risk in the bond market as well as resumption in the repatriation of export earnings.

Affin Hwang Investment Bank Bhd said in its Malaysia Strategy 2018 Outlook report that typical beneficiaries from a stronger ringgit from an operational perspective includes airlines, auto and media companies on lower operating costs. As for the balance sheet, those with a higher proportion of US dollar-denominated borrowings are also likely to see improvement.

The stronger ringgit would have a negative impact on exporters, such as rubber glove players and semiconductor companies but Affin Hwang noted that the negative currency impact on some of these players would be mitigated by the growth drivers in these sectors.

Monetary tightening and unwinding of QE

The US has started the ball rolling with its rate hike and unwinding of its quantitative easing (QE). In October last year, the US Federal Reserve started to unwind its balance sheet, starting at US$10 billion every month and this will rise by US$10 billion each quarter onwards to a maximum of US$50 billion per month.

The market is expecting another three rounds of rate hikes in 2018. The latest US tax cuts in 2018 that have just recently been passed will also lead to a stronger US dollar and greater inflation. Inflation could rise faster than expected when the higher disposable income from the US$1.4 trillion tax savings over the next decade filters through the economy.

The faster-than-expected tightening in the developed markets could also induce volatility in financial markets due to rapid capital outflows from emerging markets such as Malaysia.

In Malaysia, it is also likely that the central bank will follow suit as expectations of a hike in the overnight policy rate (OPR) has increased on the back of a strong gross domestic product (GDP) growth in the first three quarters of 2017. The prospect of Bank Negara Malaysia raising the OPR will provide a near-term catalyst for the banking sector as banks benefit from an interest rate upcycle as loans are repriced quicker than deposits. Of course, the Malaysian banking sector could see some impact from the implementation of MFRS9 but research houses, such as Affin Hwang, do not foresee any material impact on earnings as asset quality remains healthy.

Corporate earnings expected to grow

Corporate earnings among Bursa-listed companies had been disappointing considering the strong GDP growth in 2017.

Moving forward, as global economy continues to show synchronised expansion, investors will need to see improvement in earnings to be convinced.

According to Maybank Investment Bank (IB) Research’s report on 2018 Outlook & Lookouts, which was published in mid-December last year, global growth momentum is set to be maintained in 2018, expanding at 3.6%, the same pace as in 2017.

Maybank IB Research expects a 5.3% growth in 2018, with domestic demand to continue as growth driver on the back of continued growth in consumer spending, public consumption and gross fixed capital formation on expansions in both private investment and public investment.

Maybank IB Research has a core earnings growth estimate of 7.9% for 2017 and forecast of 9.7% for 2018 as compared to the “no growth” years between 2014 and 2016. Similarly, TA Securities expects earnings growth under its coverage to increase by 6.1% and 7.5% in 2018 and 2019 respectively.

External risks remain

Being an open economy, Malaysia is highly exposed to external risks, such as trade protectionism and economic nasionalism, seen in the US under President Donald Trump.

Trump has repeatedly spoke of his intent to rectify persistent trade imbalances and trade barriers with other countries — with China being on top of that list — any trade war or implication of one among the two largest economies in the world will affect the world, including Malaysia.

The uncertainty revolving Brexit as well as rising geopolitical tension between some of the countries could also impact investors’ sentiment. Among the main concerns involving geopolitical tensions are the ongoing feud between the US and North Korea, Arab Saudi and Iran. A potential war would put synchronised global economy expansion at a halt.