Although the Conditional Movement Control Order (CMCO) has been extended to 9 June, Tun Dr Mahathir’s motion for a vote of no confidence was approved by the Speaker of the house to be tabled in Parliament as early as 18 May. Macquarie Equities Research (MQ Research) thinks this is negative for sentiment but outcome is uncertain, and is of the view that another change in government could delay government spending.

Read on for a summary of MQ Research’s report (11 May) and its top stock picks.

Event

• Tun Dr Mahathir’s motion for a vote of no confidence at the next parliament sitting was approved by the Speaker of the house. However, whether the motion is actually debated is uncertain and more importantly by Dr M’s own admission, it is not clear whether he has the numbers to push the motion if it is. The uncertainty is certainly not positive for the economy nor the market, but based on the performance of the KLCI (+0.39%) on Friday, it appears that the market has brushed this off. MQ Research believes that ultimately, another change in government is most negative for sectors reliant on the government for contracts, e.g. construction. For other sectors, further changes will have less of a bearing, especially as the focus now is on a post MCO recovery in the economy.

Impact

• Motion allowed but uncertainties remain. Based on news reports in early March when PM Muhyiddin Yassin was sworn in, the Pakatan Harapan coalition claimed it had as many 115 MPs on its side. This number has bounced around, and until an actual vote is actually carried out, the outcome is uncertain. The best outcome at this point, given the ongoing Covid pandemic, may be to allow PM Muhyiddin to lead the country till the end of the year before calling for a General Election, to settle the matter once and for all. 
• Major infrastructure projects needed and on the agenda for both sides. While another change in government would be negative for newsflow for major infra projects such as MRT3 and the Highspeed Rail (HSR), MQ Research notes that this was also on the agenda for Pakatan Harapan before they were removed from power. With a need to stimulate the economy post-MCO, MQ Research remains hopeful that these projects will be announced before the year is up. MQ Research believes investors should stick with companies that stand to benefit from an increase in spend, regardless of who is in power. To that end, Gamuda and Econpile remain MQ Research’s key picks within the construction sector.
• Other potential delays. Another change in government could delay government spending on IT, although MQ Research notes that some work has already begun in recent months. In the telco sector, the 5G awards could be delayed further, but spending on the RM10bn National Fibrerisation and Connectivity Plan (NFCP) has already begun.

Outlook

• MQ Research maintains its top picks (Top Glove, IHH Healthcare, Sime Plantation, Petronas Chemicals, Malaysia Airports, Gamuda, Econpile, Tenaga Nasional, CIMB, RHB Bank) for now as it believes they each have specific drivers which will lead to outperformance even if another change in government is upon us.

Source: Macquarie Research - 12 May 2020