Tide Turns in Malaysia
In a watershed election, the opposition won the 14th General Election (GE14) wrestling traditionally held strongholds from the incumbent by taking over states such as Johor, Kedah, and Melaka. Whilst an opposition win raises questions about government regulation and economic policies, we view that such concerns on policy uncertainty will fade as the incoming government clarifies its position.
All markets dislike uncertainty and we expect this could lead to bigger discounts with the adjusting factor being lower share prices overall. This would be the immediate reaction as the selloff will be broad-based.
We are looking at 5-8% immediate downside within the next 1-3 days, where we note that pre-results the market has already corrected by 3.5% since it reached its record high in April.
Stocks including contractors, politically-linked counters and CIMB could take the brunt of the hit. Our Malaysian portfolios have currently 12-15% exposure in such stocks with the largest weights in CIMB, Gamuda and IJM.
Markets Won’t Stay Down For Long
The street is overwhelmingly bearish if the opposition wins. We are on the contrary, bullish.
Any new government will want to generate confidence for the market and overall population. This fading of uncertainty should bring investors back to the market.
Ultimately, we think markets will end up higher in less than a month than pre-election with this new government – barring any unforeseen global macro overhang and a smooth transition of power is achieved.
We take comfort in the fact that major regime changes in overseas markets only had short-term negative impact to their respective markets. The Thai military coup of 2014 drove out foreign investors but strong domestic liquidity boosted the market for a full recovery within 6 days. The correction from Brexit only lasted 3 trading days.
Similarly, the impact from Donald Trump winning the US presidency lasted just 3 hours. The unfavourable referendum for Italian PM Matteo Renzi only had a 3 minute negative effect.