This article first appeared in The Edge Financial Daily on May 14, 2018
KUALA LUMPUR: While an unprecedented change in government after 61 years under the same alliance has left many feeling jittery, any initial sell-off on the local bourse as the market opens today is expected to be cushioned by optimism over the prospects of the Malaysian economy under a new administration led by the seventh Prime Minister Tun Dr Mahathir Mohamad.
In fact, the Employees Provident Fund (EPF) yesterday expressed optimism about the long-term prospects of the Malaysian economy under the new government.
“The EPF anticipates that any potential short-term market dips would provide opportunities for further investments in the domestic markets,” the retirement savings fund said in a statement.
Meanwhile, Finance Minister-designate Lim Guan Eng sought to allay fears, saying the new government has “steady hands” to handle any market volatility.
Analysts contacted by The Edge Financial Daily said that there may be little to no knee-jerk sell-off on Bursa Malaysia today as renewed demand from both local institutions and foreign investors push share prices up.
Much of this optimism hinges on Dr Mahathir’s pledge to keep the stock market buoyant, saying that his administration will remain business-friendly and that “there is no cause to devalue the ringgit”.
Most market observers do not consider his words empty talk, especially with the new Council of Elders introduced on Saturday that will advise the new administration on economic and financial matters over its first 100 days.
The council comprises former Bank Negara Malaysia governor Tan Sri Dr Zeti Akthar Aziz, former finance minister Tun Daim Zainuddin, former Petroliam Nasional Bhd (Petronas) president and chief executive officer Tan Sri Hassan Marican, businessman Robert Kuok Hock Nien and economist Professor Dr Jomo Kwame Sundaram.
Dr Mahathir also announced Guan Eng’s appointment as finance minister, as well as Tan Sri Muhyiddin Yassin as home affairs minister and Mohamad Sabu as defence minister.
“We’ve been talking about a knee-jerk reaction before, but the appointment of the council is like saying ‘enter the dragon’. I don’t think there will be any selldown at all come Monday,” said Kenny Yee, head of research at Rakuten Trade Sdn Bhd.
Yee added not only will stocks linked to some of the council members’ benefit, but that most counters should prosper as the team’s expertise is expected to be a catalyst for Malaysia’s overall economic growth.
Even if there is a drop in the FBM KLCI upon the opening bell, most analysts do not expect it to be sizeable.
“The index may fall between 50 and 100 points [on Monday], but it should close above 1,800 points,” according to TA Securities Holdings Bhd technical analyst Stephen Soo, who referenced the FBM KLCI’s 200-day moving average of 1,795 points.
In fact, Soo believed that any intraday decline would easily be offset within the week. “There were some undercurrents [last] Tuesday that suggested insiders may have gauged a coming rally,” he said.
In fact, any dip could be a buying opportunity, Yee said.
Soo shared the same view, saying, “I would be buying [on Monday],” adding that any dip would likely cause investors to experience some short-term pain, but long-term gain if they hold on to their counters.
It is difficult, however, to know what the opening bell may bring.
“Locals will react positively but foreigners are not going to be very happy,” shared the chief investment officer (CIO) of a local financial institution.
However, he noted that local institutions are likely to provide support to the market. Foreign participation stood at 25.02% of Bursa Malaysia’s total value traded as at April 2018, according to the stock exchange’s statistics.
Another supporting factor is Pakatan Harapan’s emphasis on ridding its administration of corruption, which just might do the trick in wooing foreign investors, said the CIO.
“It suits the sustainability agenda, which is big in the West,” he said, adding that an improvement in governance at the federal level could trickle down to corporations.
Counters to watch
Stocks that could be in focus over the upcoming weeks stretch from politically linked counters and those that are heavily dependent on government contracts to the construction sector and safe-haven defensives.
First to fall could be those in which the Umno has a direct stake, namely Utusan Melayu (Malaysia) Bhd (49.77%) and KUB Malaysia Bhd (52.17% held via Anchorscape Sdn Bhd). Anchorscape is partially controlled by Umno politician Datuk Abdul Rahman Mohd Redza.
Star Media Group Bhd, in which the MCA is the largest shareholder (42.46%), is also on the line as only one MCA candidate, deputy president Datuk Seri Dr Wee Ka Siong, retained his parliamentary seat in the 14th general election (GE14).
Other politically connected stocks that may take a hit are George Kent (Malaysia) Bhd, Johan Holdings Bhd and Destini Bhd. The first two are led by Tan Sri Tan Kay Hock and third by Datuk Rozabil Abdul Rahman. Tan is said to be well known in political circles while Rozabil, who is Destini chief executive officer and largest shareholder with a 25.4% stake, is reportedly the Umno Perlis treasurer.
Felda Global Ventures Holdings Bhd is another counter worth watching, after Tan Sri Shahrir Abdul Samad, the chairman of largest shareholder the Federal Land Development Authority, lost his parliamentary seat in Johor Baru.
Meanwhile, companies with family links to politicians could also see some action. These include Petra Energy Bhd, where Datuk Mohamed Nizam Abdul Razak, brother of the former prime minister, is the non-executive director and fourth-largest shareholder (9.11%).
On the other side of the fence, investors have already flocked towards Opcom Holdings Bhd, which is led by Tan Sri Mokhzani Mahathir and controlled by his brother and newly appointed Menteri Besar of Kedah Datuk Seri Mukhriz Mahathir.
Share prices in Eden Inc Bhd and Thriven Global Bhd, which are linked to the son of Tan Sri Muhyiddin Yassin, Datuk Fakhri Yassin Mahiaddin, also picked up days before the election.
Meanwhile, companies linked to Kuok who controls conglomerate PPB Group Bhd (50.81%), Shangri-La Hotels (Malaysia) Bhd (23.03%) and Malaysian Bulk Carriers Bhd (with a total 48.46% stake via two separate vehicles), could also see some action.
Other prominent corporate figures whose companies may be in the spotlight include Tan Sri Lee Kim Yew, chairman of Country Heights Holdings Bhd, who was among the first of corporate figures to publicly congratulate Pakatan for its victory. Tan Sri Vincent Tan and Tan Sri Syed Mokhtar Al-Bulkhary are also said to be close to the new prime minister.
One more company investors would be focusing on when the market opens is My EG Services Bhd (MyEG), whose earnings are heavily reliant on government contracts.
A foreign research house factored in a 15% downside risk to MyEG if the goods and services tax is abolished as promised, since the group has a contract to monitor the implementation of the tax system. The loss of net profit from the non-renewal of e-government contracts is much smaller at 6%, the report said.
Consumer, construction, banking in focus
Last Friday, CLSA Global Research, Maybank Investment Bank Research, CIMB Research, and RHB Research Institute shared positive views on the consumer sector but were cautious about the construction companies, following Pakatan’s pledge to review all mega infrastructure projects.
Construction stocks will be in focus as major infrastructure projects such as the East Coast Rail Line and the Kuala Lumpur-Singapore high-speed rail (HSR) are expected to be reviewed by the new government. The promise to improve transparency and governance could also lead to a slower pace of investment outlays in the short- and medium term, said CIMB Research.
“Among stocks under our coverage, we believe the top losers are Gamuda Bhd (for its extensive tender exposure to mass rapid transit 3, HSR and highway concessions), YTL Corp Bhd (for its exposure to HSR and Gemas-Johor Baru rail double tracking), Malaysian Resources Corp Bhd (for its exposure to HSR and Eastern Dispersal Link), Protasco Bhd (for its exposure to government road maintenance and housing projects) and IJM Corp Bhd (for its exposure to highways and rail contracts),” it said in a note last Thursday.
Views were mixed on the banking sector, which has seen several counters surging to all-time highs recently.
CLSA downgraded banking stocks, pending clarity on policies, and was bearish on CIMB Group Bhd in particular as it holds a “perceived link” to the Barisan Nasional administration due to group chairman Datuk Seri Nazir Razak being the brother of former prime minister Datuk Seri Najib Razak.
Moody’s Investor Service also cautioned that increasing risks of capital outflows and a further weakening of the ringgit could stress operating conditions for Malaysian banks in a last Friday note.
However, a fund manager with a local insurance outfit said that the banking sector should still be supported by the fundamental factor of strong economic growth.
Since the dissolution of Parliament on April 6, the FBM KLCI surged to an all-time high of 1,880.49 points on April 19, up 43.38 points from 1,837.01 points on April 6. This rise was also influenced by global factors such as commodity gains and easing trade war fears between China and the US.
The benchmark index then lost as much as 2.86% to decline to 1,828.2 points on May 7, influenced by a rise in US treasury yields, before reversing to end up 1% 1,846.51 points the evening before polling day.