Malaysia’s stock market has underperformed – but the state elections could change that

THERE was a time when “election plays” were the rage in Malaysia’s stock market.

These counters, chiefly those linked to the once-dominant Malay party Umno (part of the then long-ruling coalition Barisan Nasional or BN), would draw dizzying activity in the lead-up to the country’s national polls.

Some of these politically-linked companies run by hand-picked bumiputeras were Renong Bhd, UEM Group, Malaysian Resources Corp Berhad (MRCB) and KUB Malaysia, to name just a few.

These companies, some giants in their sectors, came undone following the 1997/98 Asian financial crisis, when hefty debts and decades of weak managements sank these businesses.

The rapid changes in Malaysia’s political landscape over the years have also diluted the once-overpowering element of the “political plays” in the country’s stock market.

Maybank Investment Banking Group’s head of regional equity research Anand Pathmakanthan said: “Things have moved on from the old days of ‘political stocks’ linked to politicians or members of the ruling coalition… We don’t have such stock picks.”

Indeed, a great deal has changed since the shocking outcome of Malaysia’s 14th General Election in 2018 – the one which ended BN’s six-decade reign. The citizenry’s celebration over the regime change and with that, the promise of fresh reforms, was short-lived; soon enough, another period of political turmoil rolled in.

The country has gone through three leadership changes involving three different political parties in a span of four years and five months.

Following the 15th General Election (GE15) last November, some semblance of calm has returned, with the unity government led by Pakatan Harapan (PH) under the leadership of Prime Minister Anwar Ibrahim.

Investors in Malaysian equities have no doubt grown adept at navigating the climate of political uncertainty, which is set to rear its head once again as election fever builds up across six Malaysian states, including economic hotspots Selangor and Penang.

The six – Kelantan, Terengganu, Kedah, Penang, Selangor and Negeri Sembilan – did not hold their state elections concurrently with the GE15. Instead, they dissolved their legislative assemblies last month.

On Jul 7, two days after the country’s Election Commission announced that polling day for the six states would be on Aug 12, the stock market’s benchmark fell close to its 52-week low.

In fact, the FBM KLCI – Bursa’s key stock index – has sorely disappointed this year. Or in Pathmakanthan’s words: “It was a torrid H1 2023 for the KLCI.”

Several key factors weighed on sentiment. These included a re-tabled Budget 2023 that was “silent on urgent fiscal concerns” – too-high subsidies and a narrow tax base come to mind – and an exceptionally weak ringgit.

Corporate earnings have been underwhelming; the reporting season for Q1 2023 represented a second consecutive decline on a quarterly and annual basis.

Foreign selling of Malaysian equities has been persistent. It nearly doubled in June to RM1.3 billion (S$374.1 million) from the previous month. In the first half of this year, foreign selling of Malaysian equities hit RM4.2 billion, significantly more than the RM1.8 billion in the second half of 2022.

A big change or a significant swing in favour of the opposition Perikatan Nasional coalition could rattle sentiment and renew concerns over an unstable government – which would be bad news for Bursa.

By and large, analysts do not expect a big shift to unfold, although there is consensus that the state elections will test the strength of the unity government among former rival parties.

Chehan Perera of CGS-CIMB Research does not expect a change in government. In a recent Malaysia strategy report titled It’s Darkest Before Dawn, he remarked: “Contrary to some market expectations, we expect a reasonable showing by the ruling coalition in the upcoming state elections, primarily on the back of a pick-up in domestic economic activity.”

If that happens, there could be some cheer in the bourse, as it would reinforce the government’s staying power and ensure policy continuity. Analysts say that this, and the KLCI’s multi-year low valuations, could reinvigorate liquidity flows and sweeten domestic sentiment.

But as with all things politics in Malaysia, the unpredictable element is hard to dismiss. That would also mean Bursa’s sluggish showing is set to persist awhile longer until the outcomes of the state elections.