Several changes have emerged in Malaysian politics which has brought about questions on government continuity. Regardless of the outcome, uncertainties on policy continuity will plague Malaysia, at least in the near term. Policies that we reckon are at risk include the fuel subsidy change and “Covid-19” stimulus. This further solidifies our view for another -25bps OPR cut in 1H20. Assuming foreign shareholding further slips to 21.4% (decade low), KLCI could see a level of 1,442. KLCI target lowered to 1,600 (from 1,640) following some earnings cut and tagged to 16.2x PE (-0.5SD).

NEWSBREAK

This afternoon (24 Feb), several changes emerged in Malaysia’s political landscape. These include: (i) Tun Mahathir stepping down as PM and Chairman of Bersatu, (ii) Bersatu quitting the Pakatan Harapan (PH) coalition, (iii) PKR sacking its senior members Datuk Seri Azmin Ali and Zuraida Kamaruddin, (iv) including the 2, 11 MPs from PKR have also quit the party.

HLIB’s VIEW

Fragile situation. Prior to this political shake up, PH and its Sabah allies had 139 seats in Parliament (PKR: 50, DAP: 42, Bersatu: 26, Amanah: 11, Warisan: 9 and UPKO: 1). Within the 222 seat Parliament, 112 is needed to form a simple majority and 148 for a 2/3rd majority. With MPs from Bersatu (26) and PKR (11) leaving PH, this leaves the governing coalition with only 102 seats, 10 shy of a simple majority.

Possible scenarios. While this fragile political situation remains fluid, we highlight some possible outcomes. One possibility is for PH to try and garner support from at least 10 more MPs to attain a simple majority and remain in government. Note that at time of writing, DAP and Amanah said it will propose for Tun M to remain as PM. Another possible scenario is for non-PH MPs totalling 120 (i.e. BN: 42, PAS: 18, GPS: 18, Bersatu: 26, ex-PKR: 11 and others/ independents: 5) to form a new coalition, said to be called Perikatan Nasional (PN), to form a new government. However, if PN cannot get at least 112 MPs into its fort while PH’s seat count stays at 102, the absence of a simple majority by any party/coalition may result to a hung parliament. In such a scenario, the chances of a snap election wouldn’t sound too farfetched.

Uncertainties regardless. Regardless of the political outcome, uncertainties with regards to policy continuity (perceived or otherwise) will plague Malaysia, at least in the near term. Even if Tun M remains as PM under a PH government, a Cabinet reshuffle seems inevitable while uncertainties of a PN government or snap elections are self-explanatory. Federal politics aside, questions also arise on governance at the state level; PH controls Kedah, Perak, Selangor, N.Sembilan, Melaka, Johor and Sabah (via its allies). Recall that in our 2020 Strategy report (17 Dec), we highlighted the leadership continuity beyond Tun M as one of the key concerns for 2020.

Policies at risk. While it is still too early to pinpoint exactly, policies that we reckon could be at risk include (i) change in the fuel subsidy mechanism, from the current blanket method to a targeted approach and (ii) the proposed stimulus package in response to Covid-19 which was initially scheduled for this Thurs (27 Feb). For the former, this was already delayed from the initial timeline of 1 Jan 2020. Our 2020 CPI forecast of 2.0% would be lowered to 1.7% if delayed to mid-year and 1.5% if not implemented at all. On the other hand, delays in the stimulus rollout would mean greater negative ramifications of Covid-19 to the economy. As it is, we are already expecting another sequential decline in GDP for 1Q20 (around sub-3% vs 3.6% in 4Q19) while our 2020 forecast is at 4.1% (2019: 4.3%).

Case for an OPR cut. We reiterate our case for another OPR cut by -25bps to 2.5% in 1H20, premised on the negative impact of Covid-19 (which hadn’t yet escalated during the Jan cut). With downside risk to inflation (delay in fuel subsidy change) and fiscal stimulus uncertainty/delays (from the still unfolding political scene), this further solidifies our OPR cut stance.

A spook for investors. YTD (as of 21 Feb), foreigners have net sold -RM844m in Malaysian equities (mostly post Lunar New Year when Covid-19 escalated). In our view, the momentum of foreign selling will further intensify in the near term, driven by this recent political saga. We calculate a 59% correlation between the KLCI and foreign shareholding (Figure #2). Assuming foreign shareholding declines from 22.4% (end-Jan) to 21.4% (i.e. -1.0ppt to decade low), our simple regression model estimates a KLCI value of 1,442.

Lower KLCI target to 1,600. Following the update of some of the recently reported results, our KLCI earnings growth forecast for 2020 is lowered to 4.3% from 6.4%. Accordingly, our KLCI target is cut from 1,640 to 1,600 which is tagged to a PE of 16.2x (-0.5SD below 5-year mean). Our top picks are unchanged, pending the conclusion of this month’s results season.

Source: Hong Leong Investment Bank Research - 2 Mar 2020