We have three scenarios for the broad outcome of the 15th general election (GE15), namely, a majority government, a minority government and a hung parliament. We expect the market to rally on the emergence of a majority government, which we believe is where the market has stacked the odds at present. On the flip side, if the scenario fails to play out, the market sentiment could be significantly dampened. We continue to advocate investors to seek refuge in banks, telcos, auto makers/distributors, mid-market retailers and construction as we believe the government of the day, post the GE15, will continue to be highly supportive of domestic consumption.

The Nation Goes to the Polls

Malaysia is going to the polls following the dissolution of Parliament by Prime Minister Datuk Seri Ismail Sabri Yaakob yesterday. The outcome of the election, in terms of which coalition prevails, will have a profound impact on the economy and hence stock market, as its vision and policies (right-leaning, left-leaning or centrist; pro-rakyat, pro-business or equally friendly to both) will form the pathway of the nation for the next five years. Investors may rebalance their portfolios ahead of the election in accordance with their prediction of the outcome, or after the election in accordance with the actual outcome.

Suffice to say, as equity analysts, we are more inclined not to step into the shoes of political analysts to predict the specific outcome. Instead, we will focus on the broad outcome of the election and how it would alter the perceived market risk premium, and hence market valuations.

Three Scenarios: A Majority Government, Minority Government or Hung Parliament

We have three scenarios for the broad outcome of the election, namely, the election would usher in:

A. a majority government

B. a minority government

C. a hung parliament

A majority government: Defined as the dominant party within the ruling coalition controlling more than 50% of the 222 seats in Parliament, we believe this is the best-case scenario. We believe the market could have priced in high chances of this prevailing. If it does happen, we could expect the market to rally as a new ruling coalition with a stronger mandate from voters stands a better chance of pushing through policy initiatives in a more decisive manner.

A minority government: Defined as the dominant party within the ruling coalition controlling less than 50% of the 222 seats in Parliament, we believe this scenario may not be desirable to the market. Under this scenario, the decision-making process could be often stalled by bickering within partners in the coalition. What is more concerning to the market is, from experience both locally and overseas, a minority government is more often than not, prone to leadership challenges and even a total collapse. If a minority government emerges, we expect the market sentiment could be significantly dampened.

A hung parliament: Defined as no coalition of parties is able to command more than 50% of the 222 seats in Parliament to form a new government. Under this scenario, a fresh election may have to be called. While we do not rule out entirely the possibility of this scenario playing out, we do not deem it likely at all from what we have gathered on the ground.

We Maintain Our End-2022 FBM KLCI Target of 1,500 pts 

This is based on 15.5x our 2022F earnings projection (-9.4%). We continue to advocate investors to seek refuge in domestically-driven sectors including banks, telcos, auto makers/distributors, mid-market retailers and construction, amidst rising external headwinds. We believe the government of the day, post the GE15, will continue to be highly supportive of domestic consumption.

Source: Kenanga Research - 11 Oct 2022