KUALA LUMPUR (Oct 19): No matter how the upcoming 15th general election (GE) plays out, markets are not likely to sit still.

The FBM KLCI index, the FBM Emas (that comprises all large, mid and small-cap companies) and the FBM Small Cap index will continue to be volatile leading up to the GE, said equity market analysts and fund managers, adding that the swing in share prices as the GE nears is an indication that the market is nervous about the next occupant of Putrajaya.

Nonetheless, while market volatility is somewhat expected running up to the snap polls, experts opined external headwinds will be the dominant factor in determining the direction of the market.

“Regardless of the election outcome, the KLCI will remain volatile until we see clear improvements on the macro-front. However, in the longer term, the market should do well if we have a solid and credible government with the political will to carry out [the] much-needed institutional and fiscal reforms,” said David Loh, deputy head of equities at Affin Hwang Asset Management.

In the last five GEs from 1999 to 2018, the FBM KLCI added the most in GE11, with an increase of 5.48% one month before the election.

Similarly, the FBM Emas gained the most in GE11 at 4.97%, and FBM Small cap increased the most in GE14 with 4.25%.  

In the month post election, the FBM KLCI ended with the most gains in GE10, at 9.54% post election.

FBM Emas gained the most in post GE10 at 8.73%, while FBM Small Cap was the highest in GE13, which added 18.06%.

While history is a good guide, the future is not set in stone, says Fortress Capital Asset Management Sdn Bhd CEO Thomas Yong.

“Historical data from past polls will not be as useful in gauging investors’ sentiment and predicting the market trend, as other external factors continue to weigh on investment decisions.

“Investor concerns ahead of the upcoming GE are largely on issues surrounding policy stability. Until the previous GE in 2018, Malaysia has never experienced a regime change,” said Yong.

Yong added that the market is more concerned about the hawkish tone set by major central banks to counter inflationary pressures.

This year, the US Fed has raised the interest rate five times with chair Jerome Powell indicating more increases to come. As at Sept 21, the current federal funds rate stands at 3%-3.25%.

Simultaneously, the Monetary Policy Committee (MPC) of Bank Negara Malaysia has increased the Overnight Policy Rate (OPR) by 25 basis points (bps) to 2.5% as of Sept 8.

Interestingly, since the OPR hikes in May, the FBM KLCI has tumbled to a low of 1,373.36 points on Oct 13. While it has rebounded to close at 1,400.36 on Oct 18 (Tuesday), it is still 167.17 points down, or 10.66% year-to-date (YTD), compared with 1,567.53 points on Dec 31, 2021.

“A moderation of US inflation could temper the US Fed’s hawkish rhetoric. That could signal a peak in US dollar strength, which bodes well for emerging markets broadly,” said Affin Bank’s Loh.

The heightened volatility in the currency market is also spooking investors.

The ringgit has been weakening against the US dollar this year; it sunk to a record low of 4.7168 on Oct 17.  

YTD, the ringgit has shed 13.2% against the greenback to 4.7155  on Oct 18, from 4.1665 seen in end-December last year.

The waning foreign demand for Malaysian Government Securities (MGS) and Government Investment Issues (GII) further proved to be a mixture of bad cocktail for the currency, that will further dent investors’ confidence.

“The 10-year US Treasury Yield (UST yield) jumped 68.0 bps (basis points) m-o-m (month-on-month) to 3.83% as at end-September, outpacing the 10-year MGS yield, which rose 45.7 bps to 4.44% as at the same date.

“Consequently, this has narrowed the differential between MGS and UST yields, reducing the appeal of ringgit bonds for foreign buyers. The rate differential persisted in October, where the UST yields continued to outpace the increase in the MGS yields,” said analyst Woon Khai Jhek of Ram Ratings Sdn Bhd.

Malacca Securities head of research Loui Low Ley Yee reckoned that investors can look at GE14 for clues to predict market movement for the upcoming GE15 that will likely be held in November 2022.

He stated that party alliances are almost similar to what was witnessed in GE14 in 2018.

GE14 was led by two major coalitions consisting of Barisan Nasional (BN) and Pakatan Harapan (PH), while GE15 is set to witness a battle between three coalition parties — BN, PH and Perikatan Nasional (PN).

He added that should any party secure a two-thirds majority in Parliament in GE15, KLCI could rebound strongly to above the 1,600 level. In the scenario of a simple majority, KLCI is expected to be dragged down to the 1,400 to 1,500 range, according to Loui.

He shared that the data compiled for the past 10 elections (from GE5 to GE14) showed that KLCI has a total average negative return of 0.1% for the first two weeks after the elections.

“However, the trend turned positive with an average return of 2.7% one month after elections, 4.1% three months after elections, 3.8% six months later, and 11.9% 12 months post-elections,” he observed.

Nonetheless, he said the biggest risk for the market will be if the coalition party fails to secure the majority after GE15, which will result in a hung Parliament.

This could lead to an inability to pass Budget 2023, that could possibly cause a sell-down in KLCI.

Investors are advised to slowly deploy cash over the next few months for a longer-term perspective, says Areca Capital Sdn Bhd CEO and executive director Danny Wong.

“We like strong fundamental and liquid stocks for better risk management. Cash position of investing companies is one of the key considerations,” said Wong.

Echoing the same sentiment, Fortress Capital’s Yong said valuation of Asian equities have reached attractive levels, which could prove to be a call for investors to explore sectors that are not too sensitive to policy certainties, and select companies with good fundamentals.

“Having said this, different investors will have varying investment objectives, and risk and return profiles. Generally, market sentiment rewards a strong political mandate that allows political stability and policy continuity. Budget 2023 was tabled just before the election, and it provides a gauge of sectors that would benefit from the budget if the incumbent coalition wins the GE,” said Yong.

He added that the consumer and construction sectors in particular are expected to benefit from tax cuts, handouts and planned infrastructure projects, while sectors that are less affected are the banking, plantation, automotive, healthcare, oil & gas, and technology sectors.