This article first appeared in Capital, The Edge Malaysia Weekly on November 4, 2024 - November 10, 2024

WHILE equity analysts are mixed on the possible outcome of the much-anticipated US presidential election on Tuesday (Nov 5), they observe that investors are taking a wait-and-see approach since a Democratic or Republican victory will have a different impact on market sentiments and performance.

On the campaign trail, Republican candidate Donald Trump vowed to slap tariffs of as high as 20% on all imported goods and 60% on China goods, promising to use them to push manufacturing back into the US, boost domestic wages and stimulate the American economy, should he emerge victorious.

The 78-year-old, who was the 45th US president, also promised, inter alia, to extend the corporate tax cuts that were signed into law during his first term when they begin to be phased out in 2025. He also vowed to stop taxing Social Security benefits for seniors and end the Russian war.

Meanwhile, Democrat nominee and vice-president Kamala Harris aims to significantly raise the corporate tax of 21% to 28% as well as the capital gains rate on households making more than US$1 million annually to 28% from 20%. She has also promised to ban price gouging on groceries, prescription drugs and housing, and to even nominate a Republican to her cabinet if she wins.

Some of the market experts whom The Edge spoke to last week believe that a Trump win will be good for the markets based on the US markets’ positive performance when he was elected into presidency in November 2016 for a four-year term. But for the most part, most of the market watchers are neutral about the US election’s impact on Bursa Malaysia this time around.

MIDF Research head Imran Yassin tells The Edge that the US presidential election would merely have an indirect impact on Bursa Malaysia in terms of sentiments as US-China trade tensions have been playing out for some time.

“On the surface, Trump’s policy of extending the tax cuts may excite the US market and improve overall sentiment. Nevertheless, his policy in terms of tariff and trade may cause a stir in global trade. However, we believe that this time it may be different as most corporates will probably have adjusted to the situation by now since the start of the US-China trade tensions [in January 2018 when Trump began setting tariffs]. In addition, with a baseline tariff for all imports into the US, it means that all countries will be affected by this. We believe it will altogether have a neutral net effect,” Imran says.

Malacca Securities Sdn Bhd head of research Loui Low Ley Yee thinks that investors expecting a Trump victory could be relooking US corporates since the Republican’s proposed corporate tax cuts and higher tariffs would be a somewhat protectionist measure for US corporates and thus, translate into higher earnings growth.

“But conversely, Harris’ win could lead to a short-term pullback in the markets as inflationary pressure impacts corporate earnings,” says Low, who remains positive on Bursa’s outlook.

Year to date last Tuesday, the FBM KLCI was 11.03% up at 1,615.06 points after diving from a peak of 1,678.8 points on Aug 30. The Composite Index had declined in recent weeks amid selling pressure across the broader market, dragged down by heavyweights such as Tenaga Nasional Bhd (TNB) (KL:TENAGA) and Malayan Banking Bhd (KL:MAYBANK).

Within a fortnight, TNB tumbled 4.6% from RM14.68 to RM14 last Monday, while Maybank dropped 2.6% from RM10.68 to RM10.40 during the same period.

Since the markets can swing either way depending on the US election’s outcome, TA Investment Management Bhd chief investment officer Choo Swee Kee is staying neutral. While he believes that the incumbent Democratic government may bring fewer uncertainties to the market and some continuity to existing policies, for better or worse, his strategy is to keep a higher level of cash in the fund’s coffers.

“A higher level of cash will let us take [up] any opportunity once the results are clear. Until then, it is difficult for us to take a position now on the outcome,” he states.

In an Oct 29 note, Malacca Securities said the market was indeed trading cautiously ahead of the US presidential election, but that it was also partly due to the International Monetary Fund’s (IMF) lowering of its global growth forecast for 2025 as it warned of accelerating risks that range from from wars to trade protectionism.

Leaving its projection for 2024 unchanged at 3.2%, the IMF said global output will expand 3.2%, 0.1 percentage point lower than July’s estimate. It also projected inflation to slow to 4.3% next year from 5.8% in 2024.

Over in the US, Wall Street closed higher last Wednesday ahead of the presidential election and a packed week of earnings from more than 100 S&P 500 companies, including megacap tech players Alphabet, Meta Platforms and Apple, which climbed ahead of the results. The S&P 500 gained 0.89% to 5,813.67 points last Wednesday, while the Nasdaq Composite climbed 2.3% to 18,607.93. However, the Dow Jones Industrial Average dipped by 0.45% to 42,141.54.

“The European market [also] closed higher, while the Asian market ended mixed amid the political uncertainty in Japan. With the US market turning positive after a stretch of selling, coupled with a strengthening US dollar, we believe buying interest may extend to the local market, particularly in the technology and glove sectors,” Malacca Securities, which favours selected consumer counters due to higher demand and strong ringgit, said in its report. It also likes construction and property stocks amid ongoing data centre projects.

“For US markets, a Trump victory will naturally be positive as foreign funds gravitate away from emerging markets. The concern will be which other Asian countries benefitting from trade diversion are going to see higher tariffs,” observes Alex Goh, former AmBank Investment Bank Bhd head of research.

Asked what could enliven the local market towards the year end, Goh says he expects window dressing from local government-linked investment companies to provide some uplift to an unenthusiastic response to Budget 2025.

“Some positive sentiment for tech and gloves are also likely due to [the] US tariffs on China but a Trump win will accelerate US oil output and depress prices, which may be negative for oil and gas,” he predicts.

It is noteworthy that when Trump won the US presidential election on Nov 8, 2016, anticipation of tax cuts and financial deregulation led to a stock rally that saw the S&P 500 surge 5% within a month.

Despite the volatility as the US-China trade war kicked in, followed by the Covid-19 pandemic in 2020, the US stock market rose strongly during Trump’s term. In fact, analysts point out that the climb was more significant than in the four years after Democrat Barack Obama’s first election victory in 2008.

That said, according to a 2017 paper published by global investment advisory firm Research Affiliates, the US stock market generally performed better under Democratic presidents by more than 10% a year.

“However, this may be because two major economic crashes (1929 and 2008) occurred under Republican administrations, and the recoveries from those crashes were under Democratic presidencies. The Nixon presidency also saw negative stock market returns, due, in part, to elevated inflation,” the firm said.

MIDF’s Imran tells The Edge that his outfit continues to be cautiously optimistic about the economy and the equities market’s growth prospects for the remainder of 2024.

“The first US rate cuts have buoyed the financial markets thus far. Going forward, we believe that the expectation of further rate cuts will support the trajectory of the market,” he says, cautioning that the markets may remain volatile not solely because of the US presidential election but also due to the risks stemming from geopolitics and investors’ sensitivity towards US economic data.

Imran recommends a stock selection strategy based on the share price volatility of a given stock, which, under the circumstances, should be one of low to mid volatility. “Of course, this stock selection will also be supported by the stock’s fundamentals. After all, stocks with low volatility tend to not have wild swings in price, suggesting stability and reduced risk.”

Rakuten Trade Sdn Bhd head of equity sales Vincent Lau believes that the KLCI’s hovering just above the 1,600 level makes it a good time to look at Bursa stocks. “Bursa has seen a considerable correction. Now with the Chinese economy coming back and an expected soft landing in the US, this is a good opportunity to pick up Bursa stocks.”

MIDF Research favours sectors that provide good dividend yields and those that are potential laggards. As rates soften, MIDF Research expects investors to look for assets that will provide them with similar or higher yields.

Imran points to banks which tend to pay better dividends. “We have seen a re-rating of regional banks lately, including MIDF Amanah Investment Bank Bhd, hence, the (improved) share price performance [of banks] in the third quarter of 2024.

“Similarly with REITs (real estate investment trusts), its dividend yield-Malaysian Government Securities spread has widened recently, which may increase the attractiveness of real estate investment trusts,” says Imran. Like Malacca Securities’ Low, Imran likes the consumer sector as a potential laggard play.

MIDF Research and TA Securities are maintaining their year-end target for the FBMKLCI at 1,750 points and 1,690 respectively, while Rakuten Trade raised its year-end target to 1,780 from its previous projection of 1,730, driven by expectations of stronger corporate earnings and a more robust ringgit performance.

See also 'Who will win the US election and should you care?' on Page 30

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