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Malaysian markets claw back early losses from election shock

Equities prove resilient, ringgit sags against SGD, USD. Analysts await clearer picture after dust settles

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Bursa Malaysia was back in business on Monday, with the extended trading break largely cushioning the shock from last week's election upset.

Singapore

BURSA Malaysia was back in business on Monday, with the extended trading break largely cushioning the shock from last week's election upset.

Equities proved resilient, as the Kuala Lumpur Composite Index (KLCI) gained 3.91 points, or 0.21 per cent, to 1,850.42, shaking off an early panic drop to 1,800.67.

The ringgit fell by 0.18 per cent on the Singdollar in the evening to 2.9630, and softened against the greenback by 0.02 per cent to 3.9505 as at 6pm.

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Uncertainty over the victorious but potentially fractious Pakatan Harapan coalition's goals was weighed against the naming of key Cabinet ministers by new Prime Minister Mahathir Mohamad over the weekend.

CGS-CIMB analysts lowered their end-2018 target for the KLCI from 1,880 points to 1,820; UOB Kay Hian held to its earlier call of 1,830.

Watchers have spent the days since the election fretting about a potential selldown of companies seen as linked to the toppled Barisan Nasional. Lender CIMB Group, chaired by the brother of ousted premier Najib Razak, lost 5.07 per cent to RM6.55 (S$2.21).

AirAsia, whose chief executive Tony Fernandes has flip-flopped on his one-time support of Mr Najib, shed 5.41 per cent to RM3.50.

But telecoms firm Opcom, helmed by Dr Mahathir's son Mokhzani, surged by 49.59 per cent to RM0.905 - even as analysts at UOB Kay Hian wrote that "this new 'for the people' era of transparency/meritocracy should de-emphasise cronyism".

The brokerage has switched on the "buy" signal for "high-yielding defensive stocks with relatively low foreign portfolio ownership", as well as "apolitical growth stocks" without perceived ties to Malaysian political parties. It also recommends buying "selected beneficiaries of mega projects" such as the MRT 3 line and Kuala Lumpur-Singapore High-Speed Rail (HSR).

Yet DBS analyst Chong Tjen San pegged the HSR as one of the initiatives "most at risk", alongside the East Coast Railway Link, as the new government plans to review large infrastructure contracts involving foreign partners.

Mr Chong said that "we expect the construction sector to be derated following the election outcome, as there will likely be delays, renegotiation and/or cancellation". He downgraded Gamuda, WCT Holdings and Sunway Construction from "buy" to "hold".

CGS-CIMB analyst Sharizan Rosely was also nervous about the construction sector, downgrading it from "overweight" to "underweight".

Infrastructure giant Gamuda, which crashed by 17.45 per cent to RM4.21, was among the large-cap counters that Mr Sharizan slashed to "reduce".

Moody's vice-president Anushka Shah, a senior analyst at the sovereign risk group, said there is still "little clarity" on Pakatan Harapan's economic agenda beyond credit-negative promises such as abolishing sales tax and resurrecting fuel subsidies. Malaysia has an A3 sovereign rating from Moody's, with a stable outlook.

"Fiscal discipline is important to instil market confidence," she added, noting that nearly 30 per cent of outstanding government securities and Bursa Malaysia equity are held by non-residents, "which leaves the sovereign susceptible to swings in capital flows and investor sentiment".

But Mohamed Faiz Nagutha, a Singapore-based Asean economist at Merrill Lynch, was upbeat on the post-election landscape. Traders may have been jittery during the long holiday, but "any adverse knee-jerk reaction may not necessarily be sustained", he wrote.

"The key concern among investors is the likely implementation of populist policies that threaten to hurt Malaysia's fiscal position in 2019," he said. "Our analysis suggests that the negative fiscal impact is likely to be small, at less than 0.5 per cent of GDP."

Still, he warned of the risks ahead: "Tricky coalition politics and emerging market sentiment could nevertheless continue to weigh on Malaysian asset markets."

DBS currency strategist Philip Wee and economist Radhika Rao saw a rocky road ahead for the ringgit, noting that the offshore market has forecast a softer rate of 4.01 "on populist policies promoted by the new government".

"In our view, the ringgit's outlook has already weakened on domestic factors that will lead it to give up this year's appreciation," they added.

First-quarter gross domestic product (GDP) figures due on Thursday are expected to be up on the previous year by 5.4 per cent, down from 5.9 per cent growth in the quarter before.

But Jameel Ahmad, global head of currency strategy and market research at currency FXTM, said Monday's slide against the greenback made for "marginal losses, in comparison to the shock seen in the offshore markets last week", when the new government took the lead in the polls.

"The outside view is that there has been a relatively smooth transition to power for Mahathir Mohamad, and as long as this continues to be the case, it will provide an opportunity for the ringgit to recover," he said.

In the meantime, a softer ringgit "could lead to higher crude palm oil prices and provide short-term trading opportunity", said UOB Kay Hian analysts Leow Huey Chuen and Ooi Mong Huey, who stuck to an "underweight" rating on the plantation sector.

Maybank Kim Eng analysts Winson Phoon and Se Tho Mun Yi also broke away from the gloom, with a "mildly bullish" outlook on Malaysian government securities on Monday.

"An additional 15 to 20 basis point increase in the Malaysian government securities curve will likely attract strong domestic buying interest, in our view, providing some cushion," they said.

"Impulsive sell-off in offshore markets is not surprising. But as markets digest the power shift with more clarity on the new administration and policies, sentiment will likely improve."

They added that the bond and ringgit markets could turn positive by as early as the first week back to trading.

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