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Author: PublicInvest   |   Latest post: Wed, 8 Jul 2020, 9:45 AM

 

Malaysia 2020 - Back From The Brink?

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What happened: Just as 9 May 2018 had made the annals of Malaysian political history when the Federal government was changed for the first time since independence, 24 February 2020 will also forever be remembered as a day in which another near-unprecedented development almost took place – a mid-term change in government through what has been described as a back door. Throughout a frenetic weekend which saw Parti Pribumi Bersatu Malaysia, the Barisan Nasional grouping, the Gagasan Parti Sarawak grouping, Parti Warisan Sabah, Parti Islam Se Malaysia (PAS), and various members from Parti Keadilan Rakyat apparently banding together with sufficient numbers (131 parliamentary seats) to form a new government, the plan ultimately fell through when key players allegedly had apparent changes of heart.

The last 48 hours have been nothing short of suspenseful, culminating in the resignation of Tun Dr Mahathir Mohamad as the country’s 7th Prime Minister and as Chairman of his own Parti Pribumi Bersatu for reasons only known to him as he has maintained silence till now. While normal order appears to have been restored, to an extent, have we seen the end of this saga? With many from both sides of the divide appearing to pledge allegiance to Tun Mahathir who is now serving as an interim Prime Minister, the equation could still change as there appears to be no clear majority in Parliament. The Yang DiPertuan Agong will still need to determine who is in control before deciding on the next course of action. While it appears that Muafakat Nasional currently edges it with a “firm” seat count of 97, word on the street is that a group of 8 have tendered their resignations from Parti Pribumi Bersatu, Tun Dr Mahathir Mohamad included. Watch this space!

What could happen next: Heightened levels of uncertainty may be the order of the day, with this supposed failed attempt not likely to deter the various parties given the fragility of the current ruling coalition. Given that there is no single bloc with an overwhelming majority, there may very well be various kingmakers in the fold who may be influencing factors in the future. But what can be said now is that the country’s past political stability (rightly or wrongly) can no longer be counted as a key investment consideration. Investors will not take too kindly to uncertainties, the overnight 41-point drop following events over the weekend serving as a foretaste. Domestic investors are likely to adopt a holding pattern, waiting on important key initiatives to help drive the economy of its current stupor recently made worse by the coronavirus outbreak. Foreign investors are likely to exit the market first, on added concerns that their interests may not likely be at the forefront of considerations when the basic rights of the Rakyat cannot even be respected (if the “backdoor government” had indeed come to pass, in violation of the mandate given at the recent General Election).

In the interim however, the market will throw up trading opportunities until the dust fully settles. Stocks hammered in the aftermath of yesterday’s sell-down could bounce back fairly quickly. We highlight the component members of the FBM KLCI in Table 2, the suggested names being the most liquid and being relatively “safer” in these times of uncertainty. We also highlight our Outperform/Trading Buy calls in Table 4, for investors with a longer-term horizon and are able to stomach the volatility.

Sector-wise, construction may get a shot in the arm from even more expansionary expenditures as purse-strings may be loosened in efforts to drive Malaysia’s near term economic growth. A temporarily-weak Ringgit should be good for the manufacturing sector (particularly exporters) though coronavirus-related concerns and its impact on global demand may impede upsides. On the other end of the spectrum, sin (gaming and alcohol) stocks which saw some selling pressure from the near-inclusion of PAS into the supposed ruling coalition could regain some favor.

Our year-end 2020 KLCI target of 1,680 points is under review for the impact of COVID-19 on market earnings, as well as for the country’s potentially new political landscape. For stocks however, we still like AMMB Holdings, Genting, Hibiscus Petroleum, Johore Tin, Magni-Tech Industries, Mega First, Sarawak Plantations, Serba Dinamik, SKP Resources and Ta Ann Holdings.

 

Source: PublicInvest Research - 25 Feb 2020

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