22 January 2013

CLSA Malaysia Politics Market Strategy

There is no better time to blog about this post. After the plunge of KLCI yesterday, citing election risk, we came across an interesting research report by CLSA. As such, we would like to take this opportunity to share with you.


An unexpected opposition Pakatan Rakyat (PR) coalition victory in the impending 13th General Election (13GE) would spark a broad sell-off in Ringgit assets. Changes of government are not uncommon in ASEAN. Looking at the experience of Indonesia, Thailand and the Philippines over the last decade, parliamentary control has seen significant shifts and governance has been possible despite the lack of a parliamentary majority. However, Malaysia has never experienced a change in government, meaning any change will come as a shock and with a host of uncertainties.

From an equity and debt market perspective, Malaysia has always enjoyed a political premium for the stability in governance and policy-setting stemming from majority control of parliament. The immediate financial market repercussions can be grouped as follows:

  • Equity and bond markets sell-offs are likely as Malaysia's political stability premium is erased, at least temporarily. Domestic corporate, many of which have deep links with the existing government, will be putting big-ticket decisions on hold pending guidance on continuity;
  • Ringgit depreciation can be expected in parallel with the sell-off in Malaysian assets by foreign investors. This will pose another drag on broad corporate and foreign investor confidence, especially foreign debt (though positive impact on exporters should not be forgotten).
  • And, subsequently draw unfavorable attention from international rating agencies.

Near-term policy expectations

  • PR's stated policies are broadly aimed at raising disposable incomes, improving fiscal governance (key revenue generator), and encouraging private investment.
  • Higher minimum wage and lower car prices will support consumer spending, while cutting ASEAN-topping corporate tax rate would reassure corporate and investors.
  • State oil company Petronas will get more resources to invest in rebuilding reserves.

Medium-long term policy focus

  • PR's desire to "rebalance" government contracts and agreements means negative overhangs for state-dependent entities i.e. utilities, concessionaires, construction.
  • Banks as large holders of private sector bonds will face negative risk perception.
  • Reversing GLC dominance (Iskandar not impacted) will boost private investment and FDI; Khazanah could accelerate local asset disposals, lifting Bursa's free-float.

"Rain or Shine" stock picks

  • At the macro level, companies with government-dependent contracts, licenses and concessions will see sustained negative overhang and discounting, while consumer and oil & gas sectors will benefit from rising disposable income and Petronas capex.
  • Our "rain or shine" stock picks are expected to do well under either a BN or PR-led government, with earnings underpinned by higher disposable incomes, Petronas association, overseas earnings contribution buffer and a weaker currency.
  • A market sell-off would be a prime opportunity to add to positions in Axiata, PGas, UEM Land, IHH, Sapura Kencana, AirAsia and exporters e.g. rubber glove players.

Source: CLSA Asia-Pacific

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