This article first appeared in Capital, The Edge Malaysia Weekly on August 14, 2023 - August 20, 2023

COME Monday, Aug 14, the results of the six state elections are anticipated to be just a blip on the radar screen of Bursa Malaysia as investors are expected to focus more on the greater economy. That is unless key states Selangor and Penang fall into the hands of Perikatan Nasional (PN).

Fund managers and analysts tell The Edge that they foresee a muted response to the results of the polls since funds and investors who intend to dispose of their shareholding in certain stocks are likely to have done so earlier.

“However, some uncertainty may arise if there is a change in state government, especially in key economic states like Penang and Selangor. Investors do not like uncertainties and this may have a short-term negative effect on the market,” TA Investment Management Bhd chief investment officer Choo Swee Kee tells The Edge.

“As there is no expected change in federal government, the momentum in the FBM KLCI should be maintained and the direction should still be very much in the hands of the current administration.”

The majority of fund managers and analysts opine that there may be a brief stock rally on Monday if there is no change in government in the six states, while profit-taking could emerge should the Pakatan Harapan-Barisan National (PH-BN) alliance perform poorly in the polls.

“It all depends on whether investors expect the results to have any bearing on the federal government. For now, the implications are unlikely, hence any movement in the equity market on Monday will be short[-lived],” MIDF Amanah Investment Bank Bhd director and head of research Imran Yusof tells The Edge.

Politicians and political analysts have described three possible outcomes following the polls in the six states on Aug 12.

One is that PN wins five states except Penang, and will form the state governments of Selangor, Negeri Sembilan, Kedah, Terengganu and Kelantan. While this is broadly seen as the least likely scenario, the possibility of this outcome cannot be ruled out considering PAS unexpectedly outperformed the other parties in the 15th general election (GE15) last year by clinching 49 parliamentary seats.

The second, and widely anticipated possibility, is that the PH-BN alliance retains control of Selangor, Penang and Negeri Sembilan, while PN keeps its hold on Kelantan, Terengganu and Kedah.

In the third possible outcome, political analysts anticipate a two-thirds majority for the PH-BN alliance in Selangor, Penang and Negeri Sembilan, in addition to grabbing some seats in Kedah — although some quarters say this is unlikely.

Kedah has a slightly bigger non-Malay population (about 20% of the state’s population) than Kelantan and Terengganu (less than 4% each). Non-Malays make up 36.4% of the population in Negeri Sembilan, 39.2% of the population in Selangor and 55% of the population in Penang.

“As state elections tend not to have a direct impact on federal government policies, we don’t foresee an impact on any sector in particular. There will only be an impact if the [outcome of the] state elections change the politics at the federal level,” says Imran.

“This is still [up for] debate, therefore we cannot speculate on the outcome. [In fact,] we expect external factors such as the anticipated US Federal Reserve’s pause [on interest rate hikes] to have more of an influence on our equity market for now.”

On which sectors may be temporarily affected by the outcome of the polls, Areca Capital Sdn Bhd CEO Danny Wong points to those that require the approval of state authorities, such as land matters or “sin-related” segments, as possibilities.

In the week leading up to GE15 on Nov 19, 2022, Carlsberg Brewery Malaysia Bhd’s share price gained 2.6% to RM22.52, according to Bloomberg data. However,  it declined 6.1% in the two days following the election, given the somewhat surprising result, before moving up again. Heineken Malaysia Bhd’s stock price saw a similar pattern — it gained 0.3% to RM23.84 in the week leading up to GE15, then fell 6.9% in the two days after the election, before improving.

In the last two weeks, Carlsberg and Heineken have seen some profit-taking, with the counters slipping 3.6% and 1.4% respectively to RM20.40 and RM25.96 on Aug 10, valuing the companies at RM6.24 billion and RM7.84 billion.

“[Moving forward,] I foresee more stability post-state elections. [The end of the polling season] could be one of several catalysts for better sentiment and the return of foreign inflows,” says Wong.

The fund managers and analysts believe it makes sense for short-term traders to be defensive while awaiting the results of the state elections.

“We invest based on the longer-term trend and the prospects of the companies. Companies that sell to the world, such as technology-based manufacturers and glove and plantation companies, should be minimally impacted by elections,” says MIDF’s Imran.

He expects the Malaysian equity market, particularly the stocks on the FBM KLCI, to fare better in the second half of the year as investors intensify their search for assets in laggard markets. He says the lacklustre performance of the FBM KLCI in the first half of the year was due to concerns over the banking sector following the turmoil in US and European banks. In addition, the Fed’s pause on interest rate hikes was delayed.

“Having said that, advanced markets outperformed, which we take as a signal that investors are pricing in an end to the [interest] rate hike cycle. Interestingly, emerging markets, including the FBM KLCI, started to rally in July, when it was up 6%, suggesting that investors may have started to look for [stocks in] laggard markets,” says Imran.

“For the second half, we are recommending that investors look for sectors or counters that have been laggards. Since we expect that the Fed will likely have paused its rate hikes and we believe that this strongly influences the market [at large], we expect [the local] market to perform better in the second half. [Look out] for stocks with good dividend yields because that limits any downside risks to investors.”

A fund manager, who does not want to be named, also foresees a better second half. He suggests that investors consider defensive stocks such as consumer-related ones, utilities and real estate investment trusts.

“After the state elections, hopefully the market will start looking at earnings quality and the execution of the recent Madani Economy framework and the National Energy Transition Roadmap (NETR),” he says. Under the NETR, 10 flagship catalytic projects and initiatives reportedly stand to open up energy transition investment opportunities worth between RM435 billion and RM1.85 trillion by 2050. Tenaga Nasional Bhd has been identified as a major beneficiary and key player in the government’s plan.

Loui Low Ley Yee, head of research for M+ Online at Malacca Securities Sdn Bhd, foresees an improvement in the market in the third quarter. He tells The Edge there could be a short- to mid-term concentration in power and energy-related stocks as well as in construction and building materials counters.

Reiterating his view that was mentioned in a July 4 report, he adds that since short-term concerns such as the banking crisis, inflationary pressures and elevated interest rate environment have been priced in, the “downside could be limited over the near term in the global markets”.

“On the domestic front, we believe growth is still resilient, coupled with China’s recovery theme play under a manageable inflation environment,” says Low, who favours defensive stocks, such as companies with high net cash, growing earnings and high dividend yields, for the third quarter.

His stock picks include Advancecon Holdings Bhd and WCE Holdings Bhd in the construction sector; Eco World Development Bhd in property; Malayan Cement Bhd in building materials; Carimin Petroleum Bhd and Wasco in oil and gas; and Scicom (MSC) Bhd, SFP Tech Holdings Bhd and Uchi Technologies Bhd in technology.

Low also points to the memoranda of understanding inked between Malaysia and China in March, which include initiatives worth RM170 billion, as significant opportunities that can enhance trade and economic cooperation amid “the emergence of more construction projects as things stabilise” after the state elections. “Building material companies like metal and cement makers should benefit in these scenarios,” he says.

Other factors that could offer upside to the local bourse in the second half of the year include the government’s direction for green initiatives under Budget 2023, says Low.

“We believe developments in the solar and electric vehicle segments will emerge. With higher automation, artificial intelligence content and digital technology will benefit the semiconductor, automotive and solar-related sectors,” he adds.

“Cash will be an important factor. We anticipate that the high interest rate environment will be a norm in the future, therefore we think investors should opt for companies with high net cash, low gearing or stable dividend track record to weather the challenging environment.”

Last Thursday, the FBM KLCI opened 1.67 points lower at 1,460.36, from 1,462.03 points the day before. This came amid profit-taking on the back of weak market sentiment following a pullback on Wall Street overnight.

Last Wednesday, US President Joe Biden signed an executive order prohibiting some new US investments in China, in sensitive technologies like computer chips, and requiring government notification in other tech sectors. In addition, investors were seen pulling back ahead of a US inflation report that would be out during the week.

“I do not see any direct impact [on our market]. The US’ prohibition, however, may benefit other countries with similar exposure,” says Areca Capital’s Wong. 

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

P/S: The Edge is also available on Apple's App Store and Android's Google Play.