This article first appeared in The Edge Financial Daily on May 22, 2017

KUALA LUMPUR: Malaysia’s stock market, which has risen 7.7% year to date (YTD), is having a pre-election rally, Affin Hwang Asset Management Bhd (Affin Hwang AM) managing director Teng Chee Wai said, predicting a snap general election to be held in September.

“Six months before the election, the equity market will yield its best returns. Closer to the election, we see stocks giving single-digit returns,” he told The Edge Financial Daily on the sidelines of Affin Hwang AM’s “Investment Forum 2017” on Saturday.

The benchmark FBM KLCI rose 1.11 points or 0.06% to close at 1,768.28 last Friday. Trade volume reached 3.27 billion shares worth RM3.24 billion.

“The worst is perhaps over for the banking and property sectors and the market is now riding on the pre-election rally,” he said, noting the MSCI Malaysia index has consistently outperformed in the run-up to the parliament’s dissolution. The index has risen by 11.7% YTD.

Nevertheless, Teng advises investors to remain focus on picking stocks with strong fundamentals and a resilient business that can ride out any volatility caused by political uncertainty or a downturn in economic activity.   

Going forward, Teng noted there are three key market signs and pressure points that can influence the local equity market’s future direction. Firstly, the US Federal Reserve’s rapid interest rate hikes which pose negative risk sentiment. “The US central bank’s balance sheet reduction may cause liquidity tightening, while any signs of strengthening in the US dollar can further weaken Asian currencies,” said Teng.

There’s also the likelihood that China’s stimulus programmes could have peaked, with credit tightening to curb corporate leverage and property prices. “China has seen the worst over the last six years. It is in the process of recovery and it will take a while for China to completely unwind the mess it has chalked from a credit perspective, in which its debt to gross domestic product has ballooned to more than 250%. The reform is there and the market is certainly welcoming it.”

The third sign is the impending issue with North Korea, which has turned market sentiment to cautious amid rising geopolitical risks elsewhere.

Meanwhile, Teng sees the FBM KLCI breaching 1,800 points by year end as it rides on the growth of the earnings per share (EPS) in Asia, which saw its first rerating catalyst within the past five years.

“We see [the] EPS growing between 15% and 20% this year, with surprises from South Korea, Taiwan and China. Notwithstanding reflation trade driven by US President Donald Trump, China has also been Asia’s growth momentum.

“My guess is, it (FBM KLCI) could move up, but it will all depend on the recovery of corporate earnings, as well as the continuation of economic growth momentum which grew by 5.6% in the first quarter of this year. If the trade numbers improve, then surely sentiment in the equity market will improve.”

According to Teng, the market rally could be responding to anticipation of corporate restructurings in Malaysia, including Permodalan Nasional Bhd’s portfolio of companies such as Sime Darby Bhd.

“We are also seeing valuation of banking stocks starting to pick up and look attractive. They have been trading at depressed valuation and today (last Friday), they have gone up to a much more reasonable valuation. This will further lift sentiment in the local bourse.”