GE15 has resulted to a hung parliament where no single coalition has sufficient seats for a simple majority (112 needed). While PH has the most seats (82), news portals are reporting the possibility of a PN-BN-GPS-GRS alliance (131 seats), given its relatively similar structure to the previous government. As a hung parliament election outcome is unprecedented, a knee-jerk selloff on the local bourse is likely – the political crisis of 2020/2021 saw the KLCI fall -3.2%/-2.6% over a period of 1-week/1-month. We lower our end-2022 KLCI target to 1,470 (14.8x PE on mid-CY22 EPS) from 1,540.

NEWSBREAK

At time of writing (9pm, 20 Nov), the Election Commission website shows that out of the 222 Parliamentary seats in GE15, results for 220 seats have been finalised – results for Baram has been delayed due to bad weather, while polling for Padang Serai is on 7 Dec.  

The PH coalition (including MUDA) secured the largest number of parliamentary seats at 82, followed by PN (73), BN (30), GPS (22), GRS (6), Warisan (3) and 4 seats won by others (KDM 1, PBM 1 and 2 independents). This presents a hung parliament outcome where no single coalition has sufficient seats for a simple majority of 112. For the three state elections, PN won Perlis, while Perak and Pahang are both hung.

HLIB’s VIEW

What’s next? Given the hung parliament situation, the various coalitions/parties must now negotiate and forge an alliance to collectively hit the 112 seat mark. Several permutations can be drawn, with the more plausible one perhaps involving a PN-BN GPS-GRS alliance (131 seats) given its relatively similar government structure prior to parliament dissolution (related links: here and here). Should this play out – Tan Sri Muhyiddin Yassin, the PM-candidate for PN which has the most seats amongst the four – could likely return to the premiership post. While a government formed thru a loose alliance of coalitions could heighten political fluidity, the Anti-Hopping Bill which came to effect on 5 Oct, should partially help to mitigate this.

Knee jerk reaction likely. As a hung parliament election outcome is unprecedented for Malaysia, the local bourse is likely to see a knee jerk reaction today. While not exactly identical, we can take some cues on how the market reacted during recent episodes of political uncertainty. The “Sheraton Move” which resulted to a change in government (PH to PN-BN-GRS) and PM (Tun M to Muhyiddin) saw the KLCI fall -3.2% over a span of 1-week in Feb-20 – noting though that this also coincided with the initial outbreak of Covid-19. In 2021, developments that led to the resignation of Muhyiddin as PM – starting with the UMNO Supreme Council’s decision to withdraw support (8 Jul) – witnessed the KLCI decline by as much as -2.6% in almost a month, but subsequently recovered +2.2% by the time Dato’ Seri Ismail Sabri was sworn in.

Reduce end-2022 KLCI target to 1,470. In light of the near term political fluidity, we reduce our end-2022 KLCI target from 1,540 to 1,470 as we lower our PE multiple from 15.5x to 14.8x (-1.25SD to 5Y mean) pegged to mid-CY23 EPS. Our 2023 KLCI target is at 1,580 (15.4x PE; -1SD), tagged to end-CY23 EPS. Nevertheless, judging from the past two political crises in 2020 and 2021, we believe the current impasse won’t be long drawn. We would nibble on any potential market weakness in Nov to bet on the probability of a positive Dec from the “window dressing effect” – post GFC, KLCI registered positive Dec returns in 11 out of the past 12 years (92% hit rate).

Source: Hong Leong Investment Bank Research - 21 Nov 2022