The Malaysia’s parliament sitting reopened this week after a seven-month suspension and the national state of emergency will not be extended beyond 1 August. While there is an increased risk of snap elections being called, Macquarie Equities Research (MQ Research) thinks it is unlikely to happen very soon. MQ Research expects the economic reopening to dominate short-term market sentiment and remains well-weighted in thematics/tech and exporters.

Will They, Won’t They

• Parliament proceedings have resumed and the national state of emergency will not be extended beyond 1 August. This has increased the risk of snap elections being called. However, MQ Research thinks this is unlikely in the immediate future while new daily infection rates remain elevated. Instead, MQ Research anticipates parliament proceedings will be leveraged as an opportunity for parties to rally popular support for the time being. To be clear, there are political parties that have been calling for snap elections and parliament proceedings present an avenue to trigger it - via vote of no confidence and/or failure to pass the 2022 fiscal budget (sometime in Oct).

• The Sarawak state elections must be held by end-September, and the state has already vaccinated ~60% of adults. Prevalent infection rates and voter turnout will be a useful bellwether to gauge public tolerance for a general election. Recall, the Sabah state elections in 2020 has been blamed for the third wave of infections. Uncertainty in election timing could be an overhang.

Policy Risks Are the Real Risks

• Election outcomes and timing are highly unpredictable. Instead, MQ Research thinks the direction of travel on policies is more concerning and potentially more actionable – particularly the increasing skew towards populism. Without obvious popular support, contesting political parties could escalate a bidding war of populist policies. Flashback to the shock in capital markets when the government unilaterally slashed broadband pricing by 50%, and wiped out 84% of TM’s earnings and >50% of market cap. This was a highly unexpected black swan event, and MQ Research does not expect something as drastic to reoccur.

• Nonetheless, risks are non-zero and key sectors to watch include utilities (telco/energy), banks, toll operators and consumer staples like retail fuel. Outside of direct earnings risks, some corporates like energy and retail fuel carry the impact of subsidy administration on their working capital. The impact of Covid-19 on both the government’s fiscal position as well as the household incomes will exacerbate the pressure for populist policies. Thus, the longer elections can be delayed post-economic reopening, the lower the risk.

Outlook

• MQ Research still expects the economic reopening to dominate short-term market sentiment, but recommend trading out of value rallies for defensives to build portfolio resilience. Remain well-weighted in thematics/tech and exporters as well. MQ Research is mindful of volatility and uncertainty. The risk of a snap election, which was frozen during the state of emergency, is back on the table. The direction of travel of policies is worrying and compounds external risks like tapering.

Source: Macquarie Research - 29 Jul 2021