Lead Story: After the budget, what will drive market?

  • What would be the impact on the market if Trump or Clinton wins the US presidential election this week?
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This article first appeared in Capital, The Edge Malaysia Weekly, on November 7 - 13, 2016.


WITH less than two months of 2016 remaining, both the bellwether FBM KLCI and the broader FBM Emas Index look set to end the year lower for a third straight time, unless market sentiment drastically changes.

Closing at 1,648.08 points on Nov 3, the FBM KLCI is down 44.43 points, or 2.63% from the 1,692.51 points it ended at in 2015. That’s a smaller loss from the 3.9% year-on-year decline in 2015 and the 5.7% loss in 2014 when the index shed 105.71 points to 1,761.25 points, from 1,866.96 points at end-2013.

Before 2014, the FBM KLCI had ended higher year on year for five straight years, more than recovering from the 569.28-point or 39.3% y-o-y plunge to 876.75 points in 2008. A similar yearly trend was also seen in the FBM Emas Index, which captures both the FBM Top 100 and FBM Small Cap index constituents (see table).

Chris Eng, head of research, products and alternative investments at Etiqa Insurance and Takaful, reckons the FBM KLCI still has a chance of ending the year higher.

“In general, the whole of the August, September and October rally came one month ahead of our expectation, but was not strong enough. We were hoping that the KLCI could rally above 1,700 points in October before retracing in November. That said, given the weak rally in 3Q, we do see a potential for a rebound rally in December after a retracement in November,” he says.

Chan Ken Yew, head of research at Kenanga Investment Bank, also reckons a year-end rally “is still possible” if the investing world is not overly unhappy with the US voters’ choice of a new president and if the US does not hike its key interest rate more than 25 basis points by year-end.

“The driver of such a rally, if any, is probably the anticipation of an early general election, apart from the year-end window-dressing,” says Chan, who is keeping his FBM KLCI target at 1,715 points for 2016 and 1,755 points for 2017. He admits, though, that 1,695 points for end-2016 is probably “more realistic”.

Still, Chan is “hopeful” of improved investor sentiment, especially in the small and mid-cap space, aided by the RM3 billion special fund to bolster small and mid-cap stocks proposed in Budget 2017 and reportedly backed by deep-pocketed government-linked institutions: the Employees Provident Fund, Khazanah Nasional Bhd, Permodalan Nasional Bhd (PNB), Retirement Fund Inc (KWAP) and Lembaga Tabung Haji.

US citizens will head to the presidential polls on Nov 8 (results are expected around 11am to 12pm Kuala Lumpur time on Nov 9, barring a recount) and the last US Federal Open Market Committee (FOMC) rate meeting for this year is on Dec 13. After that, the FOMC is scheduled to meet again four times in the first half of 2017 (end-January, mid-March, early May, mid-June) and another four times in the second half of next year (July, September, October and mid-December).

“As I understand it, the major winners of a US election are defence plays as the world may become a more dangerous place, regardless of whether Hillary Clinton or Donald Trump wins, with regional conflicts possibly emerging in Asia. Otherwise, a Clinton win will likely translate into blue chips doing better in Malaysia as the risk sentiment improves while a Trump win should be bad for emerging markets as a whole,” Eng surmises.

Asian shares were mixed last Thursday as traders stayed on the sidelines while others sought solace in bonds and gold on the possibility of a Trump presidency coming to pass this Wednesday.

“Malaysia would also lose in a Trump win as he is pushing more broadly for trade protectionism. Malaysia is one of the most export-oriented countries in the region, with exports of value-added accounting for 49% of GDP — the second highest in Asia after Singapore (56%),” Credit Suisse director and head of Malaysia equity research Tan Ting Min wrote in an Oct 18 note.

Credit Suisse’s global experts expect global yields to rise and yield curves to steepen under a Trump presidency, driven by increased policy uncertainty and higher inflation expectations. “This will likely spur outflows from emerging markets and broader risk assets, including from Malaysia,” the note read. A Trump win could also “result in a more decisive shift among Asian economies towards China and away from the US, including for Malaysia”.

A Clinton administration, meanwhile, “will likely be more interventionist and assertive in its foreign policy”, including taking a harder line on perceived provocations by China, Russia or others — a factor that could “increase risk of conflicts in Asia and the South China Sea, including for Malaysia”. Clinton is also likely to renegotiate the Trans-Pacific Partnership agreement (TPP), as she is opposed to “its current form”.

Back home, investors believe snap polls might happen next year, although the country’s 14th general election (GE) only needs to be called by May 2018.

“The general perception is that the Malaysian stock market will do well before a general election is called. This would keep Malaysia on its toes in 2017. A look at the last six GEs shows that the Malaysian stock market outperforms the region just one month before a GE, and underperforms one month after. We believe the stock market could be range-bound heading towards a GE if investors are uncertain about the results. Post the GE, the performance of the stock market will depend largely on the quality of the win,” Tan wrote in a Sept 2 note when turning less bearish on Malaysia.

Unless the opposition gets its act together, votes for the opposition will be split in many three-cornered fights, thus benefiting the incumbent, market watchers say. Others think Prime Minister Datuk Seri Najib Razak might want to wait until there’s more feel-good factor on the ground. The Bersih 5 rally on Nov 19 in Kuala Lumpur might be a sentiment barometer, one observer says.

“Yes, purely from a stock-market perspective, political stability is a plus,” one seasoned fund manager says. “Whether that alone is enough to bite is another question altogether as there are many factors in play ... and for the better Malaysian stocks, some prices have come off but they are not really cheap because you have the large institutions that cannot put a lot more money outside the country,” he adds.

“Yes, there is hope for more construction and infrastructure contracts with China but is that really a new story for Malaysia? And didn’t Malaysia also say it stands to benefit from the TPP, which both the US presidential candidates are opposed to? Are the people increasing their investments here or expecting earnings to be better next year?” the fund manager questions.

Not everyone is as pessimistic, though. Another fund manager is hopeful of opportunities to trade Malaysian stocks in the coming six months if one believes most of the negatives have already been priced in: “There are opportunities — the ‘Wahid effect’ on PNB is among the positive news flow — but you need to work harder to find them and constantly monitor the good ones for potential drivers. If you have a slightly longer horizon, it doesn’t matter if the rally happens in December or March or May,” he says.

The “Wahid effect” refers to the changes that could happen at PNB, driven by former minister in the Prime Minister’s Department and corporate chieftain Tan Sri Abdul Wahid Omar, who joined as chairman in August. In October, he was joined by former Ekuiti Nasional Bhd CEO Datuk Abdul Rahman Ahmad, who is now PNB president and group CEO.

“We believe the combination of Wahid and Rahman could herald some real changes in PNB and its main subsidiaries,” Credit Suisse’s Tan wrote in a Nov 2 note headlined “Wahid’s Midas Touch”. “There are lots of low-lying fruits in PNB and its group of companies… [areas] where management has not worked the assets hard enough, there is a lot of scope for Wahid to push for higher returns.

“Wahid, an accountant by training, is famed for his hands-on approach on turning around and ‘cleaning up’ balance sheets. He has a track record that speaks for itself. During his tenure helming UEM Group, Telekom and Maybank, he has managed to execute change and push through changes for the better, especially in two key areas — ROEs and dividend payouts,” Tan told clients in the note.

PNB’s top holdings include a 42% stake in Malayan Banking Bhd, 48% in Sime Darby Bhd and 66% in S P Setia Bhd. It also has a 14% stake in Telekom Malaysia, Bhd 11% in BIMB Holdings Bhd and 8% in Tenaga Nasional Bhd.

Any M&A would likely take time to materialise. In the meantime, Kenanga’s Chan remains hopeful that second half earnings will improve from the first half but warned that “there could still be downgrades” ahead for companies that continue to report weaker-than-expected earnings.

“So far, we have seen 33.9% of companies under our coverage deliver weaker-than-expected results in 2Q2016, and 37.8% in 1Q2016. We are hopeful that this percentage will decline in 2H2016,” he says.

If one believes the ringgit has stabilised and everyone who wanted to sell had already pared their holdings, signs of improvements in earnings could well be reason enough to return from the sidelines. Will the numbers disappoint?