This article first appeared in Capital, The Edge Malaysia Weekly on August 23, 2021 - August 29, 2021

WHEN the so-called “Sheraton Move” took place in February 2020, resulting in the collapse of the Pakatan Harapan administration, the benchmark FBM KLCI tumbled 4.2% that week on relatively heavy selling because of the uncertainty about the government.

But as the writing was already on the wall, the market appeared to have shrugged off last week’s termination of the Perikatan Nasional government. After a knee-jerk reaction on Monday, the broader market was calm about yet another change in government after just 17 months.

In the first four days of last week, the FBM KLCI actually gained 0.65% to close at 1,514.95 points on Thursday, following a 1.38% rebound on Tuesday.

Perhaps the fact that Malaysia is set to see three prime ministers in as many years partly explains the market detachment. The situation is not “something new” for investors as they do not envisage any significant changes in the direction of the country.

With any luck, the new political order may even provide greater certainty compared with the previous administration, say analysts.

“Tan Sri Muhyiddin Yassin only had a slim majority in parliament during his administration and it was not a very stable political situation. Investors believe that the King will be able to identify a successor that can command a greater majority. This is what I read from the market’s rebound,” a research head who declined to be named tells The Edge.

MIDF Amanah Investment Bank Bhd research head Imran Yassin Yusof observes that investors are not too politically driven nowadays. “We have gone through this before, so the concern is less than before. The situation is the same and we are not going to get things like protests.

“So, I don’t think you can put too much weight on political developments when it comes to the stock market’s performance. If you look at the past record, the correlation between politics and the stock market is not as high as people thought. Certainly, there is removal of uncertainty.”

Moreover, he notes that the downside risk for Malaysian equities is low as the local bourse has been a laggard this year compared with its regional peers. “Other supporting factors are the vaccination progress and the easing of restrictions under the National Recovery Plan,” he adds.

However, the research head who did not wish to be named, maintains his FBM KLCI year-end target of 1,575 points, highlighting that market concerns about policymaking cannot be ignored if the unstable political situation persists, particularly when the focus turns to Budget 2022 come end-October.

“There are fears about the deferment of the policies that have been announced. For example, for infrastructure projects, the tender for the Mass Rapid Transit 3 (MRT 3) project is supposed to be out by the end of the year. Also, the 5G network and electric vehicle policy are still outstanding and should be executed this year, but they could be held back. That would obviously have an impact on the market,” he says.

“There could also be a loss in momentum in the crucial projects. This may then affect the delivery of corporate earnings.”

In any event, he believes that foreign investors may want to see a more convincing majority before pouring money into the market.

On that score, the Yang di-Pertuan Agong Al-Sultan Abdullah Ri’ayatuddin Al-Mustafa Billah Shah has decreed that the new prime minister must pass a confidence vote in the Dewan Rakyat as soon as possible to ensure he enjoys majority support among lawmakers.

“They [investors] are unsure if this is just a band-aid solution. If the winning coalition can win [the] people’s confidence and push the general election to mid-2023, then they will have more time to demonstrate their ability,” says the research head.

MIDF’s Imran is of the view that foreign investors are focused more on stock valuations, judging by their recent net buying positions. “We cannot say they will stay away from our market. Our market has been trading at a discount for quite some time against the historical mean. So, maybe there is some value there,” he says.

To be clear, Malaysian equities have fallen out of favour with foreigners, evidenced by the fact that foreign shareholding in the local market had dipped to an all-time low of 20.2% at end- July from 24% in May 2018. Year to date, foreign funds have net offloaded RM5.98 billion worth of local equities, according to MIDF.

Even local institutions have been net sellers to the tune of RM3.4 billion. But fortunately, retail investors are biting, and have snapped up equities worth RM9.38 billion.

The country’s political turmoil appears to have a more significant impact on the local currency, which slipped to a one-year low of 4.2410 against the US dollar last Thursday. Since the beginning of the year, the ringgit has declined 5.6% against the greenback.

“The ringgit is certainly the victim of political uncertainty, especially as the pandemic has turned out to be more resilient [than expected]. The government needs to put in more financial resources to support the economy. In doing so, it will have to borrow more and this will weaken our credit strength and the ringgit,” observes the research head who did not want to be named.

MIDF’s Imran sees US tapering playing a more significant role in the ringgit’s movement compared with domestic politics. “US tapering will cause heightened volatility for the ringgit due to factors from the US. It is not so much about the weakening of the ringgit, but the US dollar is also strengthening against other currencies. We have downgraded our 2021 average ringgit forecast to 4.13 from 4.07,” he says, adding that the local currency is unlikely to weaken to a “worrying level”.

Given the ringgit’s weakness, the other research head favours export-oriented stocks, as well as plastic packaging manufacturers and technology players. “Technology is more insulated from domestic political concerns,” he says.

“We think there is value in glove stocks, while consumer stocks will benefit from the reopening of the economy. However, as banking is the lifeblood of the economy, it will be exposed to economic weakness, which will be determined by how the political situation evolves.”

Imran thinks that the political developments will not pose a direct impact on corporate earnings as business continues as usual. “We don’t go to the streets and it does not cause a lot of disruptions. A lot of policies have been approved and the civil servants remain professional to ensure that the policies are being executed. Unless there is a delay or reversal in the policy direction, then we will look at the impact on corporate earnings,” he says.

Imran favours commodity stocks such as plantations and oil and gas, with his top picks being Kuala Lumpur Kepong Bhd, TSH Resources Bhd and Genting Plantations Bhd. “Crude palm oil prices have been very strong, yet plantation companies’ share prices do not reflect that. In the past couple of days, the Plantation Index has gained some strength. Technology is another sector that we like, as well as sectors that are tied to reopening [of the economy], and banking as well.”

UOB KayHian Research said in a recent note that the market has largely priced in risk premiums associated with the constantly shifting sands of Malaysian politics. “Future government coalitions are unlikely to significantly deviate from the policies adopted by Perikatan Nasional. In essence, the equity market’s valuation has already priced in the country’s structural socioeconomic challenges that implies persistently high fiscal deficits and sub-optimal domestic reinvestments.”

The research house’s top picks in the large-cap space are CIMB Group Holdings Bhd, Genting Malaysia Bhd, Inari Amertron Bhd, Press Metal Aluminium Holdings Bhd, Sunway Bhd, Telekom Malaysia Bhd, Yinson Holdings Bhd. For mid-caps, it favours Hap Seng Plantations Bhd and Pentamaster Corp Bhd.

CGS-CIMB Research said in an Aug 16 note that political uncertainties will be negative for domestic sectors such as banks, construction and property, as well as stocks with foreign shareholding. “Exporters [gloves, technology and plantations] as well as defensive sectors will be the least affected.”

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