This article first appeared in Capital, The Edge Malaysia Weekly on August 29, 2022 - September 4, 2022

FORMER prime minister Datuk Seri Najib Razak has begun serving time but Malaysia is still none the wiser on the exact timing of the 15th general election (GE15), which has to be held by September 2023.

Just how much does the fluid political scene affect decision-making in the local stock market?

Areca Capital Sdn Bhd CEO Danny Wong, for one, says the ongoing political developments in the country would not cause him to make significant changes in his investment strategy.

“We [generally] avoid politically-linked stocks,” he says, “unless there is a fundamental change from the GE, like the one in 2018 where there was a change of government that led to policy changes. From what we have heard, most of our peers don’t think there will be a big change, but we have to play it by ear,” he tells The Edge. The impact of GE15 is expected to be slightly less compared with GE14 in 2018, and there is “more certainty now”.

Similarly, William Ng, chief investment officer at LeInves PLT, says he will skip all politically-linked counters.

Interestingly, he is holding more cash now after taking profit from the recent stock market rally. Since touching a low of 1,411.32 points on July 13, the FBM KLCI has rebounded as much as 7.6% to reach 1,518.78 points on Aug 16.

“We’re monitoring monetary policy in the US and Malaysia as well as the election timing. As the market has run up for quite some time, I chose to cash out and wait for opportunities to buy at low levels again.”

In the first three days of last week, retail investors remained net buyers on Bursa Malaysia with a net inflow of RM128.6 million, according to Bursa Malaysia’s data. During the same period, the benchmark FBM KLCI slipped 2.47% to close at 1,467.26 points last Wednesday.

According to MIDF Research, retail investors were net buyers for 21 out of 33 weeks of 2022. Year to date, they have net bought RM1.76 billion.

Foreign investors were net buyers for 22 out of 33 weeks of 2022, with a total net inflow of RM7.72 billion. In contrast, local institutions were net sellers for 26 out of 33 weeks, with a total net outflow of RM9.48 billion.

During the year, net buying by foreign funds surged to almost RM1.2 billion for the week ended March 18. However, local institutions net sold the most at over RM1.3 billion for the week ended March 4.

As foreign investors are more sensitive to political uncertainties, Thomas Yong, CEO of Fortress Capital Asset Management, notes that attention may be diverted to other Southeast Asian markets, but stocks in unique or well-performing industries will be less affected.

Local investors have become better adapted to the level of political uncertainty in the Malaysian scene since 2018.

That said, Yong notes that volatility caused by political developments has largely been short-term in nature. “In the longer term, investors would still reward the companies with strong fundamentals that deliver shareholders’ returns well. Our investment stance remains flexible to allow switching to stocks that can offer higher investment returns,” he explains.

Little wonder that for seasoned investors like Wong, economic indicators like interest rate movements are more important.

“Investors have somewhat priced in the adjustment in stock prices because of the aggressive rate hikes, but recent data has shown that some commodity prices have softened, and this potentially suggests that inflation has peaked. Eventually, the US Federal Reserve may not be that hawkish in rate hikes. It will be more like a soft landing, that’s why the market has rebounded.”

Even so, Wong continues to see lingering risks in global markets, including uncertainties stemming from inflation and the chances of an economic recession.

“It depends on whether inflation will come under control or even go back to normalcy. I think it will be a technical one should a US economic recession happen.”

Covid-19 continues to be a risk, especially with China continuing its zero Covid policy, he adds.

Ng is of the view that the global markets will remain relatively stable, unless US inflation takes a longer than expected time to ease.

There may still be shocks given that inflation in Asia, where currencies have largely weakened against the US dollar, have not yet peaked. He reckons that investors may have taken a short-term view in the local equity market, leading to the current temporary rebound. Although oil and gas as well as plantation stocks are set to outperform in the current reporting season, he says their earnings will moderate in the subsequent quarters due to softer commodity prices.

“After Budget 2023, there should be a clearer picture in terms of the financial performance. On Budget 2023 plays, there may be a chance to buy into construction and property stocks if there are goodies for them. These two sectors are very cheap now.”

As it is, Budget 2023 is scheduled to be tabled in parliament on Oct 28. Year to date, the construction index on the local bourse has gained 2.4%, while the property index is down 6.7%.

Wong believes Asia, including Malaysia, remains attractive as share prices have come down after the recent correction. If the US rate hike pace softens, inflows could flow back to this part of the world.

“We are still very much in the economic reopening theme as well as rate hike, so banking and consumer stocks will benefit. For the long-term trend, it will be selective tech stocks.”

Ng prefers fast-moving consumer goods stocks to tap the economic recovery.

While digesting 2Q corporate earnings, Yong recommends that investors select stocks that are able to pass on production cost inflation.

“Apart from that, we think that the post-pandemic recovery play is still very much intact, and companies in a broad spectrum of industries will resume their normal growth path.”

He adds that the financial sector also benefits from the rising interest rate environment, but exporters could be impacted by a global economic slowdown in the short term, brought about by aggressive monetary tightening measures among major central banks.

Although the US job market has been healthy, Yong expects US markets to be volatile in the near term on the back of the cloudy inflation outlook.

“A meaningful recovery of the US markets would require clearer guidance from the US Fed on its monetary policy.”

US inflation slowed more than expected in July, expanding 8.5% year on year against the 9.1% increase in June, underpinned by a sharp drop in the cost of gasoline. This has raised hopes that the Fed would become less aggressive on interest rate hikes.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.