This article first appeared in Capital, The Edge Malaysia Weekly on May 21, 2018 - May 27, 2018

THE stock market bloodbath many had anticipated after the historic win by opposition coalition Pakatan Harapan (PH) in the 14th general election did not take place when trading resumed last Monday.

There was heavy selling throughout the week, particularly of counters known to be linked to the defeated Barisan Nasional. But the selling pressure has been quite well absorbed so far. The benchmark FBM KLCI did not drop more than 53.28 points, or 2.8%, last week.

Malacca Securities says there was hefty net foreign selling of RM682.6 million last Monday and RM837.3 million the following day, but it alleviated to RM320.7 million on Wednesday and RM384.4 million on Thursday.

Amid the excitement over the first change of ruling party in the country’s 61 years of independence, shares on Bursa Malaysia recovered quickly after plunging early last Monday — the first trading day following a five-day break after the elections.

The FBM KLCI nosedived after the opening bell, dipping as much as 2.7% — the sharpest fall in 14 weeks — in the first five minutes of trading. But to the surprise of many, most of the losses were quickly pared as the bulls emerged. The benchmark index ended the day up 0.2%.

Week on week, the KLCI was up 0.43% to close at 1,854.50 points last Friday.

Interestingly, some dealers noticed strong retail interest returning last week, which helped to lend support to the lower liners.

Building confidence

It has been a hectic first 10 days in charge for Prime Minister Tun Dr Mahathir Mohamad, but he and the members of the coalition don’t have time to celebrate the historic win over Barisan Nasional (BN) in GE14.

For the new government, it is all about getting started on the reform agenda. The coalition had promised to draft a comprehensive reform plan within the first 100 days after taking over Putrajaya.

In his first week, Mahathir has already announced moves to zero-rate the Goods and Services Tax (GST), review various projects signed off by the previous government, and end the fluctuation in fuel prices.

The establishment of the Council of Elders, comprising members who are no strangers to the international and local investing fraternity, and a partial Cabinet lineup, helped restore the confidence of investors. The government also declassified the audit report on 1Malaysia Development Bhd (1MDB) and asked Attorney-General Tan Sri Mohamed Apandi Ali to go on leave.

Mahathir gave an interview to The Wall Street Journal that was telecast live in Japan last Tuesday to address international investors. He noted that there is no need for capital controls unless “some people start fiddling with the currency value, depressing it and impoverishing countries”.

Many foreign fund managers associate capital controls with Mahathir, who took the bold step during the 1997/98 Asia financial crisis, causing mayhem in the market.

The swift pace at which things are happening, to some, shows PH’s ability to form a government. Suffice to say, Malaysia is charting new milestones almost daily. Few will disagree that there is an air of genuine optimism among the people now.

While investors continue to seek clarity on several points in the PH manifesto, the Malaysian stock market remained fairly stable last week despite the surprise election outcome.

Geoffrey Ng, investment adviser and director at Fortress Capital Asset Management (M) Sdn Bhd, admits that the performance of the local bourse surprised him.

“The initial selling was expected, but the recovery was faster than expected. I suppose that was partly due to the fact that the new government has been doing a good job so far in terms of providing investors with greater clarity about what its plans are. This essentially gives confidence to the market,” he tells The Edge over the phone.

Rakuten Trade Sdn Bhd vice-president of research Vincent Lau, however, says the overall performance of the stock market has been within his expectations. “The volatility is there, the construction sector took a beating and BN-linked counters were also hit. Investors are looking forward to the new governance and policies to be implemented by the PH government. At the moment, market sentiment is still positive.”

He agrees that Mahathir has done a great job so far. “The setting up of the Council of Elders gives a lot of confidence to the market. Foreign investors have been selling but the selldown has started tapering off. This is a good sign because most people are already looking for a reset and a new dawn,” he says.

Post-GE14 rally wishful thinking?

But the new government has also drawn some flak. There has been criticism about Mahathir planning to take up the education minister’s portfolio amid a disagreement among PH members over cabinet positions.

Another snag is that Finance Minister-designate Lim Guan Eng can only be officially appointed after he is cleared of a corruption charge.

So, should investors be cautious because of some political uncertainty although the situation is not as bad as many had expected before the polls?

Considering that the market is entering uncharted territory, Fortress Capital’s Ng opines that the political uncertainties will continue to drag on for at least another few weeks before the dust settles.

He points out that there has always been significant collaboration between the government and the private sector in the past and that a number of blue chips are government-linked companies (GLCs).

“The manifesto of PH saying it will de-emphasise the government’s involvement in business might lead to uncertainty about how the GLCs will behave going forward. If PH fulfills its promises, then the GLCs should be pulling back and have less influence on private sector businesses.”

That perhaps explains why Ng is doubtful about a post-election rally soon. He says the initial euphoria will probably start waning over the next few weeks. After that, the market focus will be on reform measures.

“The new government is doing a lot of house cleaning. Therefore, there could be significant uncertainties in terms of any additional growth drivers that will be coming from the government sector. The investors should stay cautious, but there will be a lot stock-picking opportunities as a result of economic reforms.”

Ng notes that the measures taken by the PH government have been very pro-rakyat, but this will burden its finances.

“Yes, the measures are positive as they could boost consumer demand and make things more affordable for households. But at the same time, this will affect the national coffers and the budget, and subsequently, the government’s ability to improve the economy,” he warns.

In contrast, Rakuten’s Lau thinks that the dust has more or less settled and the political developments have to do with formal requirements. As things get clearer in the next 90 days or so, he believes foreign investors will return.

“With the GST being zero-rated, Anwar out of prison, and a new [partial] Cabinet in place, I think a post-election rally is possible, barring any major issues in the US. On the political front, it is fairly stable and getting clearer. The euphoria will continue as most people are still on cloud nine,” he says.

Lau says the stock market is likely to stabilise and remain positive in the coming weeks, but if there is any weakness, investors should take it as a buying opportunity, especially for construction stocks that have been oversold.

“Investors will continue to closely watch the PH government’s reform agenda in the next 90 to 100 days.” He says market sentiment is positive at the moment, and fundamentals may be overlooked.

Earnings season now

Fortress Capital’s Ng concurs. “This month is earnings season, but the market is likely to look beyond the results, especially for BN-linked counters. Earnings growth will be good in the first quarter, but I don’t think that will have a bearing on what is going to happen for the rest of the year.”

Lau believes corporate earnings will still play a role this month. “If results comes in within expectation, we will have a stronger base to move up. As long as the results do not disappoint, then it is okay.”

A regional head of equity capital markets acknowledges that fundamentals are important, but investors are now more concerned about how PH will execute its policies.

“The reality is, political sentiment is exuberant right now, but that has yet to translate into buoyant market sentiment, because political uncertainties are still not off the table,” he says.

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