Politics, elections and greed

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Recent events have raised expectations that the general elections will be called by the first half of next year. We believe that while easy gains have been made in the stock market, the greed factor could create upside for selected proxy stocks.Rising momentum for Barisan NasionalBN’s momentum is clearly evidenced by: a) research polls up to the middle of this year showing positive momentum for the prime minister’s approval ratings, based on the perception that he is serious in his efforts to strengthen the economy and improve government efficiency, b) BN retaining the seat in Batu Sapi, Sabah, with a wider majority and winning the Galas, Kelantan by-election and c) a big blow to rival PKR dealt by the well-respected Zaid Ibrahim, who dropped out from contesting for PKR’s No 2 post and resigned from the party.

However, public approval for the PM does not entirely translate into political support or votes for BN, especially from the Chinese community which still represents an important element in the upcoming elections, as Chinese votes are still significant in about 70 of the nation’s 222 parliamentary constituencies.

We also note that: a) the swing in Chinese votes in Galas changed from a 400-vote deficit to a 200-vote advantage for BN, a somewhat marginal shift in sentiment, b) public sentiment in many urban areas could be pro-opposition in light of unresolved issues pertaining to education, equality and justice, and c) BN’s stronghold in Sarawak is expected to crack, albeit retaining its two-thirds majority.

The next state election for Sarawak, which is due by April 11, should give some indication of public sentiment.Past elections and the stock marketFive out of the last six elections saw the market trend higher 12 to six months before the polling dates. However, our study also shows that the market remained largely flat to lower in the six-month period prior to the polling dates.

Fortunately this time round, we believe that, amid a bull market, the greed factor will ensure market participation in election themes.

Some interesting observations of recent elections: a) there has been no consistent election theme in past elections, b) broadly speaking, government-linked companies (GLC), as an asset class, have not consistently outperformed the market in recent GEs in the 12-month run-up to polling dates, and c) nevertheless, a handful of individual GLCs have consistently outperformed the market in the last few general elections, like CIMB Group, Affin Holdings and Malaysia Building Society (based on price performance 12 to six months before elections).

Present election investment themes are expected to revolve around: a) GLCs, which still need restructuring, b) development of prized government properties, c) priority mega projects like Iskandar Malaysia, the MRT and priority sectors like oil and gas, d) selected plays involving the key BN stronghold states of Johor, Sarawak and Sabah, and e) GLC laggards.

StrategyKey election picks that also have fundamental appeal are CIMB Group (a consistent outperformer in previous elections), Gamuda (BN retention of power ensures speedy deployment of MRT projects), Kulim (restructuring and Johor state proxy), SapuraCrest Petroleum (this favoured operator in the oil and gas sector is expected to announce an aggressive fleet expansion plan), Sime Darby (laggard and CPO play), UEM Land (acquisition of Sunrise strengthens bid for 1MDB’s Sungai Besi development; also a proxy to the Iskandar Malaysia development).

Our investment proxies for BN’s stronghold states are Dayang Enterprise, KKB Engineering, Hock Seng Lee for Sarawak, Kulim for Johor, and Karambunai for Sabah.

Note that some of our picks are not strictly election plays in the traditional sense, and some are also highly speculative, such as Karambunai (rumoured to be getting a casino licence).
This article appeared in The Edge Financial Daily, December 1, 2010.