Following the recent round of political turmoil in Malaysia, Macquarie Equities Research (MQ Research) shared its view that the General Election that it has previously expected to take place between 4Q20 and 1Q21 would most likely be delayed, should there be a switch in government at this point. Albeit the political stir, MQ Research believes that the government’s added stimulus worth RM10bn is the right thing to do, and therefore, remains constructive on the Malaysian market.

Event

• PM Muhyiddin Yassin’s RM10bn added stimulus package to lessen the blow of Covid on the population was overshadowed by the claim of Anwar Ibrahim that he had the support of a sizeable majority of MPs to form a new government. Adding credibility to his claim was a media statement by UMNO President Zahid Hamidi that MPs, not UMNO, supported the Perikatan Nasional government and a number of UMNO MPs were supportive of Anwar.

Impact

• Political uncertainty short term? Some political observers are pointing up to 20 MPs from UMNO were supporting Anwar and that Anwar has >120 MPs out of 222 on his side. Anwar has remained mum on numbers. The final outcome on the leadership, however, will have to wait for the ascent of the Agong (king), who is currently in hospital but could make a decision in the coming days rather than weeks.

• Delayed Election? A switch in government at this point would most likely delay the GE which MQ Research had expected to take place in 4Q20 or worst case early 1Q21. A sizeable majority could even see the GE pushed out to 2023, and allow the pump priming to continue, albeit with some delay (months). The same would be true of other government-related projects.

• Government finances – doing the right thing costs money. MQ Research believes the government’s added stimulus, focused on the B40 and M40 groups, is the right thing to do and appears to bring forward some measures MQ Research expected in the upcoming Budget 2021. GST could be reintroduced albeit at a lower rate, and it may also consider letting Malaysia’s A- credit rating go. As one commentator put it at a roundtable which MQ Research attended, “preserving the credit rating at all costs means nothing if there is no economy to come back to”. Considering the global situation, and the MYR’s relative strength of late, this may not be a bad thing, in MQ Research’s view. By MQ Research’s estimates, ceteris paribus, with the added stimulus the budget deficit expands to 6.7% and debt to GDP rises to 61%

Outlook

• MQ Research remains constructive on the Malaysian market. The political events today will stir volatility, but while government-related initiatives may be delayed, it does not change MQ Research’s view. MQ Research’s preference remains with domestic themes, i.e. digitalisation of the economy (telcos, namely TM), selective banks for a rebound (RHBBBANK, CIMB), construction/infra (GAM, ECON, RANH), capital management (TNB) and opening up of the economy (GENM, MAHB). Exporters remain in MQ Research’s top picks list with PCHEM and SDPL, although MQ Research moves TOPG to its Underweight list, replacing HART, following its recent downgrade. MQ Research also removes IJM from its Underweight list followings its underperformance.

Source: Macquarie Research - 25 Sept 2020