Short term GE14 shock expected for markets, but long term positive
KUCHING: As in any unprecedented event, a knee-jerk reaction is expected on the FTSE Kuala Lumpur Composite Index (FBM KLCI) when the capital market reopened after three days of closure.
Kenanga Investment Bank Bhd (Kenanga Research) said this was expected, seeing as how the market was expecting companies associated with the previous regime and its cronies along with listed companies that are linked to China investment in Malaysia could experience a selloff resulting in the FBM KLCI to tumble.
This is due to the political pledge by Tun Mahathir Mohamad to review major projects that has the Chinese government’s involvement.
“In April, the FBM KLCI reached an all-time closing high of 1,895.18 which concurrently saw a large net inflow of portfolio capital from abroad totalling RM1.3 billion in the same month.
“FBM KLCI last traded at 1,846.51 on Tuesday, May 8 prior to GE14. Until we see a clear policy signal from the new government we expect in the short term there would be volatility and some outflow of portfolio capital but not to the extent that would destabilise the capital market,” said Kenanga Research in a note.
In the immediate term, the research firm said circuit breakers would be applied to stop any free fall on the stock market.
“Meanwhile, we also expect that foreign bond holders of long term government bonds to continue to decline in May following a net decline of RM3.1 billion of Malaysian Government Securities ( MGS) in April, reducing total foreign holdings of MGS to 44.3 per cent of total in April from 45.6 per cent in March.
“While we are still concerned on the foreign fund flows in the coming months following expectations for the US Fed’s rate hikes, rising uncertainties following the unprecedented GE14 outcome is expected to result in exacerbated outflow of bond funds in May and the coming months.”
MIDF Amanah Investment Bank Bhd (MIDF Research) also saw that fund outflows began before GE14 as foreign attrition began five trading days before polling day with four days, with foreign investors net selling seen at greater than RM200 million.
“Besides pre- election fevers hitting the market, other external developments influenced investor sentiment that time such as the sheer progress of US-China trade talks and the Fed’s acknowledgement of the US inflation nearing its target,” it observed in a separate note.
“Interestingly, foreign attrition on the day before GE14 shrank by RM42.4 million from the day before to minus RM231.2m net, the second lowest during the five day selling streak. The local bourse on that day was up by one per cent at 1,847 points amidst buying activities by local institutional funds which have lent support to the market. As of May 9, 2018, the cumulative yearto-date inflow stands at RM2.52 billion net compared to RM14.3 billion accumulated before GE13 during the period from January 1 to May 3, 2013.”
With a new government being formed under Pakatan Harapan, MIDF Research expect some level of foreign attrition in the short term as political uncertainty – at least until the full appointments of cabinet members.
“However, this could be mitigated by Tun Mahathir’s assurance on the maintaining a great relationship with foreign trading partners and investors, along with his solid track record of being Malaysia’s Prime Minister for 22 years,” it said.
“Meanwhile in the long term, foreign investors’ perception towards Malaysia will improve as Pakatan Harapan proceeds to work on its promises. From there, we could expect waning political uncertainty to attract investors back to Malaysian shores.
“Overall for 2018, the foreign net inflows is expected to be lower than last year’s RM10.3 billion inflow in lieu of not only the “uncertainties” related to the elections, but also on the headwinds caused by geopolitical events such as the US pulling out of the Iran nuclear accord, crisis in Venezuela, Syrian War, and also more interest rate hikes by the Federal Reserve in the US and also the Bank of England.”