LAST Wednesday, Malaysia witnessed a historic power shift as the Pakatan Harapan (PH) coalition — spearheaded by Tun Dr Mahathir Mohamad — secured a simple majority to form a new government in Putrajaya.
PH’s victory, winning 122 of 222 parliamentary seats in the 14th general election (GE14), came as a big surprise to many in the investing fraternity as the local market was said to have priced in a base case scenario of Barisan Nasional (BN) retaining power with a slimmer majority. A strong post-election rally, similar to the one after the previous poll, had been anticipated if things had remained status quo.
However, BN, the world’s longest-ruling political party, only managed to garner 79 seats in the poll, with a popular vote of barely 33.7%. Malaysia is, to a large extent, seen as entering uncharted territory, with uncertainties on the horizon.
Against this backdrop, most pundits expect a bumpy ride ahead in the local stock market as a result of a knee-jerk reaction. Some believe the market will come under selling pressure when it resumes trading on Monday after a three-day break.
But the smooth transition of power so far, with Dr Mahathir having been sworn in as the seventh prime minister, and the two-day break after the election, may have helped reduce the fear of change and uncertainties.
Some quarters say Dr Mahathir, who governed the country between 1981 and 2003, has all the experience needed to form a government to run the nation. Already, the new government has announced an initial 10-ministry cabinet.
So, will there be a “bloodbath”, which many are expecting, on Bursa Malaysia? Should you sell to flee?
It may not be an apple-to-apple comparison, but reference could be made to the election of Donald Trump as the 45th US president in 2016.
The Trump win also came as a shock but Wall Street seemed to have welcomed his presidency as the Dow Jones Industrial Average broke through the 20,000 mark for the first time in January 2017 and continues marching to record highs.
Now, if Malaysians think the new PH government led by Dr Mahathir can do a better job in terms of running the country, the stock market could stage a post-election rally, possibly sooner than expected, after one or two turbulent trading sessions.
In other words, buying opportunity could emerge as early as this week.
AmBank Group CEO Datuk Sulaiman Mohd Tahir says investors should have a strategy of picking stocks with good fundamentals, earnings visibility and yields that are experiencing selling pressure.
“The reason being the overall macro fundamentals are expected to stay intact with modifications for the betterment of the economy. That means corporate earnings will remain healthy,” he tells The Edge.
With a mature society, stability in the country and healthy and strong fundamentals, Sulaiman expects confidence to return to the market, although he believes we may still see some short-term volatility.
These uncertainties are likely to ease once there is clarity on key issues, including the abolishment of the Goods and Services Tax as well as the reintroduction of the petrol and, potentially, electricity subsidies.
“With Tun Mahathir having a strong track record, added with Datuk Seri Anwar Ibrahim the PM-in-waiting, [it] augurs well for the country. The focus will be on the new cabinet line-up, now that Tun has been sworn in as the PM. This will help build investors’ confidence and further ease the negative noises,” says Sulaiman.
He, however, points out that the external environment will also influence the performance of the market. “External pressure cannot be ruled out, in particular the focus on the aggressiveness of the US rate hike, and potential incoming data from Europe, the UK and Japan.”
Short-term pain, long-term gain
Dr Tan Chong Koay, founder and chief strategist of Pheim Asset Management Sdn Bhd, acknowledges that a certain level of near-term volatility, albeit minimal, is expected due to the uncertainty in the transition to a new government.
He is hopeful that the new government will appoint a cabinet with competent individuals who are focused and knowledgeable, with integrity and a big heart to serve the people.
“If such members are appointed, investors would not need to worry too much,” Tan tells The Edge.
He recalls that the stock market plunge in 2008 was mainly due to the global financial crisis, instead of BN failing to retain a two-thirds majority in parliament for the first time since the May 1969 election.
“This time, Malaysians have given PH a mandate to form a new government. With this new-found confidence in Malaysia, it is likely to have a positive impact on the market. On the other hand, there may be sharp corrections [in the near term]. In such a scenario, investors would search for buying opportunities, taking a longer-term view,” says Tan.
He points out that the new government promised improved corporate governance and transparency and this will likely restore the confidence of the investment community.
“There is a possibility that it will have a positive impact on the market this week,” Tan says, adding that investors should take a longer-term view when the market is depressed.
In the event the market corrects significantly on Monday, Tan is of the view that investors should seize the opportunity to hunt for bargains in companies with good growth potential, low gearing and good-quality management, especially those small and mid-cap stocks that are undervalued currently.
Sufficient time to react
Like it or not, the outcome of GE14 was certainly unpleasant news for investors who had bet on a BN victory.
It is noteworthy that the US-traded iShares MSCI Malaysia exchange-traded fund (ETF) fell 6% overnight.
Fortunately, markets were closed last Thursday and Friday after the Chief Secretary to the Government Tan Sri Dr Ali Hamsa declared the two days as public holidays. This should give the market sufficient time to digest the change and monitor the development.
Mohd Redza Abdul Rahman, head of research at MIDF Research, opines that the closing of markets until Sunday will provide investors with time to strategise their investment-making decisions before the market opens on Monday.
He says the market will undoubtedly react due to uncertainties over projects and initiatives that may be changed or removed. However, the implementation of a dynamic price limit by Bursa will help alleviate any drastic movements through trading halts once the soft limit is hit.
“This will prevent a steep market movement from investor overreactions that would result in prices hitting limit up or limit down,” he tells The Edge.
In terms of sectors, Redza opines that construction and building materials will likely see a short-term negative impact until the clouds over the mega projects clear.
“We believe that existing projects that are underway will run as normal, but we are not ruling out the possibility of a review of their costs.”
Danny Wong Teck Meng, CEO of Areca Capital Sdn Bhd, expects the market to react negatively to the surprise PH win in the earlier part of the week, after which it would turn positive, but no one knows the timing.
“A knee-jerk reaction to uncertainties from the weak sellers and opportunists is expected. Investors should look for fundamentally strong companies because short-term volatility could be a long-term strength.”
Wong says the next 100 days will offer clarity to investors, but fundamentals and logic should prevail.
“I expect some cash-rich local funds to take this opportunity to buy if there is a panic sell-off. The market thereafter will focus on the new government’s ability to calm markets, international investors and rating agencies,” he says.
Moving forward, Wong expects a cleaner and more efficient government that could attract foreign investments.