During last week’s trading on Bursa Malaysia, mild bargain hunting interest by local investors in key banking, plantation and utility heavyweights lifted the local blue-chip benchmark index ahead of the highly anticipated state elections. This is in spite of the more cautious regional market tone, where investors fret over the potential for China to fall into a deflationary spiral following a sharp decline in inflation data. Overall, investors consolidated their positions and were mostly sidelined ahead of the keenly awaited outcome of the six state elections over the weekend.

Last week, the local blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) regained 11.95 points, or 0.83 percent, to close at 1,457.16, as gains on CIMB (+11sen), Maybank (+11sen), Tenaga (+20sen) and Public Bank (+4sen) overcame falls in CelcomDiGi (-7sen), IHH Healthcare (-3sen) and Maxis (-4sen). Average daily traded volume last week decreased slightly to 3.06 billion shares, compared to 3.11 billion shares the previous week, while average daily traded value eased to RM1.79 billion, against the RM1.84 billion average the previous week.

We may witness immediate-term correction in the FBMKLCI this week following the conclusion of six state elections last Saturday that raised more questions than answers about the nation’s future direction. Thus, relatively defensive sectors like consumer, utilities and healthcare could come under investment radar this week while waiting for Malaysia’s 2Q23 GDP announcement this Friday, which is expected to grow by 3.5% and 2.8% based on consensus and our forecasts respectively.

On the surface, the outcome of six state elections came within market expectations with the Pakatan Harapan (PH) and Barisan Nasional (BN) alliance maintaining its hold on Penang, Selangor and Negeri Sembilan while Perikatan Nasional (PN) keeping its control over Kedah, Kelantan and Terengganu. However, the details revealed that the unity government is losing grip on its strongholds as the opponents have not only strengthened their position in states controlled by them but also made significant inroads into Selangor and Penang.

Overall, the total voter turnout in these state elections was only 70.1% versus 82.4% in 2018. PN, consisting of PAS, Bersatu and Gerakan, has succeeded in increasing its total seats in six states by 69.8% to 146 versus its previous 86 while the PH and BN coalition saw its total seats falling by 31.7% to 99 from 145 as the Malay ground shifted in a big way from PKR and UMNO to PAS and Bersatu. UMNO is the weakest link in the unity government’s alliance winning only 19 of the 107 seats contested, while PKR and AMANAH only secured 44.1% and 25.8% of the 59 and 31 seats contested respectively. DAP maintained its nonMalay and urban support, winning in all 47 seats contested except 1 in Kedah. Besides robbing PH and BN their two-third majority in Selangor, PN has also secured full control of Terengganu at state and parliamentary level now.

The outcome clearly indicates the urgent need for the unity government to regain Malay support before GE16. This may have implications on future policies and budget allocations and limit the government’s ability to implement the Madani Economy framework and progressive fiscal reforms without much hesitation. The long delayed fiscal consolidation measures, which the investors are keenly waiting for, could be delayed to prevent another political backlash. The election results may also influence the inflow of foreign direct investments and may have implications on the already announced multibillion investment decisions in Malaysia, if investors fear fundamentalism is gaining popularity among the populace.

While the weaker mandate for the unity government will have no official bearing on the federal government, there are also speculations that weaker performance of UMNO could pressure a leadership change within the party, which could affect the unity government. However, this impact is not insurmountable if the East Malaysia states maintain their current support for the unity government.

At the backdrop of these uncertainties, investors are likely to take profit this week and sit on the side line pending more clarity on the local and external fronts. Locally, the focus will shift to three key events in the 2H23, which are the mid-term review of 12th Malaysia Plan, the New Industrial Master Plan and Budget 2024. Strategic policies and initiatives under these short-term and long-term plans should be in-line with the Madani Economy framework’s focus areas that targets economic growth, fiscal sustainability, competitiveness and regionalisation, good governance, inclusive growth, quality jobs with higher wages, equality of opportunities. Externally, the US Federal Reserve’s next policy decision and China’s actions to avert the deflationary pressures will be closely watched.

Source: TA Research - 14 Aug 2023