KEY INDEX LIKELY TO SEE CORRECTION

TOP consumer and banking names led the FTSE Bursa Malaysia KLCI (FBM KLCI) higher last Tuesday before the market closed for a long General Election (GE14) holidays from Wednesday to Friday, as local funds returned to bargain cheaper-priced stocks following recent sell-offs.

The benchmark index climbed 18.31 points to close at 1,846.51, off the opening low of 1,819.28 and high of 1,851.73, as gainers swarmed losers 677 to 281 on the back of robust volume totalling 2.35 billion shares worth RM2.8 billion.

This was a sharp contrast to a sell-off on the broader market a day earlier when investors continued to wind down their investments in the local market ahead of the GE14, ignoring firmer regional markets following rallies in United States stocks which had been lifted by a solid April jobs report. On Monday, the FBM KLCI lost 13.63 points to close at 1,828.20.

No doubt investors out there have one most important question in their mind now. How will the FBM KLCI react to GE14 results when it reopens today?

Pakatan Harapan (PH) pulled off a stunning victory against all odds to win the election, ending Barisan Nasional’s (BN) sixdecade reign of power.

With the architect of modern Malaysia back at the helm, we can look forward to a transformation that will put the nation on the right path to relive the glory days in the medium-to- long run.

In the immediate to short term, the FBM KLCI is expected to correct until the new government can convince investors that measures highlighted in its election manifesto will not be detrimental to economic growth and increase fiscal deficit.

With many factors hanging in the balance, the key index is expected to lose its valuation premium over its closest developing peers until clarity on policy matters emerges.

At 15.3 times consensus calendar year 2019 price-earnings ratio, the FBM KLCI is already trading at about 7.5 per cent premium compared with developing peers’ valuations.

Expect the index to correct towards 1,715 points in the immediate term to match regional valuation before trending lower in the third quarter as foreigners exit on policy concerns.

This will be a good period to buy on weakness as new Prime Minister Tun Dr Mahathir Mohamad is an excellent strategist and an outstanding politician.

With an experienced and competent team, he is expected to disclose effective measures in the first 100 days in office to drive economic growth and narrow the budget gap.

The removal of the Goods and Services Tax (GST) is a prime concern as the fiscal deficit can shoot up to 4.1 per cent from projected 2.8 per cent this year if GST is replaced with Sales and Services Tax.

However, according to a Bernama report, Dr Mahathit has assured that the country has sufficient revenue to remove GST.

To narrow the budget gap in the immediate term, operating or/and development expenditures need to be cut while revenue can be increased through efficient tax collections, asset disposals, like stake divestments in listed companies held by government-linked companies, and land sale.

The private sector can play its role by filling the void in development projects as well.

These measures have the potential to disrupt gross domestic product and corporate earnings growth in the short term and contribute to some volatility in the capital market.

Construction and building materials sectors should feel the heat. The Kuala Lumpur-Singapore high speed rail (HSR) and the RM55 billion East Coast Rail Link (ECRL) projects are likely to be reviewed. The ongoing Mass Rapid Transit (MRT) 2, MRT 3 and Light Rail Transit 3 projects should proceed due to their relevance in easing traffic congestions in Klang Valley but the costing for some of these projects can be reviewed.

Construction players such as Gamuda Bhd and IJM Corp Bhd should feel the negative impact if the government renegotiates their toll concessions. Higher minimum wage is another downside risk for businesses, especially for plantation, construction, and small and medium enterprises.

With election uncertainty over, property sales may recover.

Until further information is made available, the prospects for the industry remain largely flat.

Some sectors will benefit from the implementation of PH’s election manifesto, especially the removal of the GST.

The consumer sector will benefit from higher disposable income and it should lead to topline growth for most consumer companies. For instance, companies like Amway, Hup Seng, Johore Tin and BAT are undervalued and could attract buyers.

Besides, the removal of GST will benefit the gaming sector. Gaming revenue has been subjected to six per cent GST in Malaysia, which has been absorbed by Genting Malaysia and BJToto.

The abolishment will lead to a few hundred million in tax savings. The likely weakening of ringgit in the short term will lead to greater earnings as well for these players as most of them have business exposure overseas.

For the same reason, it is worth considering exporters like Kossan, Top Glove, Inari Amertron and MPI.

Technically, a sharp correction is likely due to the defeat of the BN coalition. It is a negative surprise for the local stock market as it creates uncertainty.

A breakdown of crucial supports from the 4/4/18 pivot low of 1,811 and the 200-day moving average (1,795) will mean a test of better supports at 1,780 and 1,750 can be expected, with 1,700 also possibly tested for support resilience. Immediate resistance will be from the mid-Bollinger band presently at 1,865, with stronger resistance at 1,880.

Externally, the lower than expected US inflation data and positive outlook for the crude oil price can act as pacifiers to check the downside risk.

While the lower inflation may influence the timing of Federal Reserve’s future rate hike decisions, US President Donald Trump’s move to pull the US out of the Iran nuclear deal is positive for upticks in oil prices. In 2015, the Obama administration and Iran signed a deal to defer sanctions on Iranian oil exports, while Iran curbed its nuclear programme. Last Tuesday, Trump said the US was pulling out of that deal and restoring sanctions.

In the immediate to short term, the key index is expected to correct until the new government can convince investors that measures highlighted in its election manifesto, especially the abolishment of Goods and Services Tax, will not be detrimental to economic growth and increase fiscal deficit.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.