KUALA LUMPUR (May 7): The local equity market is expected to remain volatile ahead of the upcoming 14th general election (GE14), given a widely expected fierce contest between the ruling Barisan Nasional (BN) and the opposition coalition led by former prime minister Tun Dr Mahathir Mohamad, according to AllianceDBS Research Sdn Bhd.
Without predicting the election outcome, AllianceDBS Research said its base case assumes that the status quo — BN retaining a simple majority in parliamentary seats — will be maintained, which will see the election overhang ease post GE14 as investors focus on fundamentals again.
"In particular, laggard mid- and small-cap stocks will likely be re-rated given their attractive valuations and the return of risk appetite among investors post GE14," AllianceDBS Research said in a strategy note May 4, which focuses on positioning the local market for a post-GE14 rebound.
In addition, AllianceDBS Research noted that the construction sector "should be re-rated" following the recent correction, given the implementation of major infrastructure projects such as the East Coast Railway, Mass Rapid Transit 3 and the Kuala Lumpur-Singapore high speed rail.
"Following the correction in construction stocks, we now add another theme premise on the re-rating of construction sector post GE14 provided the status quo is maintained," it added.
As for the upcoming GE14, the research house said, "In the event of a change in federal government, we believe there would be further selldown in the near term due to policy uncertainty."
"However, the worst-case scenario is a hung parliament where neither BN nor the Dr Mahathir-led opposition wins a majority, leaving PAS [Islamist party] as the kingmaker to negotiate for the formation of an unstable federal government," AllianceDBS Research said, adding that "this would lead to protracted risk aversion by investors".
Ahead of GE14, it observed that the broader Malaysian market has continued to be affected by dampened investor sentiment, with the FBM KLCI Small Cap Index, which comprises mid- and small-cap stocks, having seen a wave of selldown.
"The selldown has been so severe that the FBM KLCI Small Cap Index, which represents the top 98% of Bursa Malaysia Main Market excluding the top 100 stocks, has seen its price-to-book valuation being de-rated to -1SD of 0.8x," AllianceDBS Research said.
Year to date, the research firm noted that the index has dropped 15%.
Post GE14, the focus for investors will be back on fundamentals, while the equity market is expected to resume its upward trajectory, given continued earnings growth amid synchronised global economic expansion, it said
"The performance of the benchmark index will largely be driven by the re-rating of banking stocks which contribute more than 60% of FBM KLCI earnings growth estimate of 9.8% in 2018," AllianceDBS Research added.
According to the research firm, its top banking stocks — Malayan Banking Bhd, CIMB Group Holdings Bhd and Hong Leong Bank Bhd — are expected to ride on the cyclical recovery in loans growth and interest-rate hikes.
"Improving loan growth and another overnight policy rate hike by Bank Negara Malaysia in the 2H18 (second of half 2018) will be the share price catalysts," it added.
For end-2018, AllianceDBS Research said it is keeping its FBM KLCI target of 1,950 points, which is derived using a bottom-up valuation approach. At the time of writing, the benchmark index is trading at 1822.08 points.