This article first appeared in The Edge Financial Daily on January 4, 2018

KUALA LUMPUR: Malaysia’s stock market showed first signs of the much-anticipated pre-election rally yesterday, as market breadth turned bullish with 771 stocks advanced compared with 305 declines.

Trading volume surpassed five billion shares for the first time since March last year, with 5.11 billion shares worth RM3.68 billion traded yesterday compared with Tuesday’s 3.7 billion shares worth RM2.11 billion. This has prompted some analysts to suggest a pre-election rally could be at play.

Stocks likely to benefit in the run-up to the 14th general election (GE14) also moved to the upside yesterday. Shares in Malaysian Resources Corp Bhd (MRCB) climbed 7.8% to RM1.25, while DRB-Hicom Bhd traded up 1.8% to RM2.30. My EG Services Bhd (MyEG) gained more than 10% to RM2.46, and was among the top gainers. UMW Oil & Gas Corp Bhd shares rose 1.5% to 33 sen, while KUB Malaysia Bhd added 3.5% to 44.5 sen and Felda Global Ventures Holdings Bhd (FGV) shares were up 3.3% at RM1.86.

“The stock market is showing a very positive trend upwards as volume hit 5.1 billion shares, while close to 800 counters were in positive territory. It is likely the momentum is in anticipation of the country’s general election [taking place] in the first half of this year,” Hong Leong Investment Bank head of retail research Loui Low told The Edge Financial Daily on the phone yesterday.

This means the dissolution of parliament is likely to happen in February.

Historically, the Malaysian equity market would see a rally before parliament is dissolved.

Maybank Investment Bank head of research Wong Chew Hann said there could be a combination of factors contributing to yesterday’s strong market performance, noting that regional markets were also on an uptrend.

“Foreign investors have also turned net buyers recently, favourable to the equity market,” she told The Edge Financial Daily.

In Maybank Kim Eng Research’s regional research report dated Jan 2, Wong is expecting a period of volatility in equities and the ringgit in the run-up to, and post polling day, with a sizeable political newsflow possibly having an impact on investors’ sentiments.

“Assuming parliament is dissolved just after the Chinese New Year (Feb 16 and 17), we could potentially see higher activity in equities from January to [the] GE14 and some trading opportunities may manifest.

“Our end-2018 FBM KLCI target of 1,840 points is based on 15.6 times 12-month forward earnings,” she added.

Affin Hwang Asset Management director of equity strategies and advisory Gan Eng Peng pointed out yesterday’s spike in the stock market was initially seen on a few politically-linked counters such as MRCB, DRB-Hicom and FGV, which quickly spread to the rest of the market.

“Retail participation was much higher than normal. This is probably the early stages of a second-tier rally. We expect active rotation among the names at high volume and this is a trading market,” Gan said via a text message.

CIMB Investment Bank head of Malaysia Research Ivy Ng also opines that yesterday’s strong market performance signals the start of the pre-election rally.

“The strong KLCI performance could be due to the January effect and [the] pre-GE14 rally as a special Barisan Nasional (BN) supreme council meeting will be held today (yesterday) to discuss the preparations for GE14. January is historically a good month for Bursa Malaysia and historically, it has chalked up a gain of 1.9% month-on-month over the past 40 years,” Ng told The Edge Financial Daily via an email.

Rakuten Trade Sdn Bhd vice-president of research Vincent Lau concurs.

“This could be the beginning of the much anticipated pre-election rally. There was [a] news report talking about a special BN supreme council meeting on the preparations for the upcoming election. Most investors probably didn’t want to miss out on the rally and the positive sentiment eventually spilled over to the broader market. If you look at companies such as KUB, FGV, MyEG and MRCB, most of them are starting to pick up.

“I think this is just the start of the anticipated pre-election rally and there are still legs for the market to go further,” Lau said on the phone.

He also opines that the current market provides a good opportunity for investors to trade, with the KLCI on track to breach the 1,800-point level. The KLCI closed up 10.09 points or 0.57% at 1,792.79 yesterday.

However, Inter-Pacific Securities Sdn Bhd head of research Pong Teng Siew believes the stock market rally is not sustainable, recommending investors to take profit now as trading volume hovers above five billion shares.

“The last time we saw volume traded over six billion shares was in March last year. So, if the market continues to see higher volume in the near term, it is better to take profit and by the end of the month, you should have taken all the profit that you can,” he said.

Rather, Pong reckons yesterday’s strong market performance was the result of continuous stimulus programmes by central banks worldwide except that in the US.

“The [global] market was very unnatural today (yesterday). Practically everywhere is going through an upswing cycle including in Malaysia due to the stimulus programme from central banks around the world. Markets are awashed with money; investors are reacting the only way they can — being bullish,” he said.

Pong opines that the market is overbought despite the good economic indicators in the country, as they did not translate into better corporate earnings during the third quarter ended Sept 30, 2017. He also noted that cost escalation was obvious for Malaysian companies as observed from the quarterly results.

A fund manager with a local asset management reckons local institutional funds will gradually take profit as the election date draws closer.

“This (strong market performance) was obviously the beginning of the pre-election rally. We could take advantage of the rally by taking some profits as we approach the election.

“While it appears that the incumbents are on a stronger footing now, the risk of an unprecedented victory by the opposition at the ballot box has not been priced in. There will be a knee-jerk reaction if that happens, and we don’t want to be caught off guard. I think when parliament is dissolved, foreign investors could turn net sellers or stay on the sidelines,” he said.