Malaysia’s ‘fragmented’ political landscape is bad for foreign investors

AN amicable solution to leadership concerns would be positive for the Malaysian stock market given that this will stem foreign fund outflow from Bursa Malaysia which has reached RM4.81 bil for the week ended July 16.

On this note, CGS-CIMB Research if of the view that the parliamentary majority support required for the Perikatan Nasional (PN) Government to stay in power may not be tested when Malaysia holds a special five-day sitting (July 26-29 and Aug 2) to allow lawmakers to be briefed on the national recovery plan.

“This is because the Dewan Rakyat speaker would have the final say on these matters during the session even if members of parliament are allowed to debate and put forward questions during the upcoming Parliament sitting,” justified head of research Ivy Ng Lee Fang in a strategy note.

“Given that it is a short session, there may not be time allocated for a no-confidence vote as recovery plans take priority.”

As such, potential resolution of this issue could be pushed forward to the next two parliament sessions which are scheduled for (i) 15 days (from Sept 6 to 30) and (ii) 32 days (from Oct 25 Dec 16).

“These are key dates to watch on potential changes to the political landscape,” CGS-CIMB pointed out. “There could be potential negotiations among the various political parties ahead of these crucial parliament sessions to find a resolution on the leadership issue.”

An amicable solution between various political parties which could stabilise the Government is likely to be viewed positively by the market, added the research house.

In a related development, CGS-CIMB said the recent decision by UMNO to withdraw from PN is negative for the market as it leads to further uncertainties on the future leadership and policy directions of the country.

“This is likely to lead to further outflow of foreign funds from the Malaysian equity market and companies with high foreign shareholding may be vulnerable due to potential selling,” projected the research house.

“Our tracking of foreign shareholding revealed that since the 14th General Election (with entailed change of Government), foreign investors’ shareholding in the Malaysian equity market has declined from 24.2% in March 2018 (pre-GE14 in May) to 20.3% in June 2021 (lowest since the statistics were made available).”

As a whole, CGS-CIMB envisages a less positive stock market outlook on for 2H2021 premised on concerns that the corporate earnings growth rate could peak by 2Q 2021F or disappoint in 2H 2021F, stimulus measures to support businesses and individuals will progressively end in 2021 while incremental liquidity available to retailers will likely decline against a year ago as well as a return of short-selling.

“We had predicted an end-2021 FBM KLCI (KLCI) target of 1,759 points based on 16 times P/E (price-to-earnings ratio) or its three-year mean to reflect higher liquidity in the market as well as political uncertainty,” noted the research house.

“Our preferred sectors are banks, gaming, oil & gas (O&G), media, packaging, EMS, rubber gloves and healthcare while our top three stock picks were Inari Amerton Bhd, Public Bank Bhd and Telekom Malaysia Bhd.”

By : Cheah Chor Sooi – FOCUS MALAYSIA

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