Investment summary
Malaysia’s election machinery is now in high gear ahead of its 14th general election that must be held by August this year. In our view, market expectations that the ruling Barisan Nasional (BN) coalition will be returned to power with Najib Razak as prime minister – implying continuity of existing business- and investment-friendly policies – have supported the recent catch-up performance in Malaysia equities after lagging most of its Asean peers in 2017. Based on the MSCI Malaysia index, the market is trading at a forward PE of 15.6x, or 1 standard deviation above its 5-year average, while the MYR has strengthened 4% against the USD since the start of the year.

These suggest meaningful downside risk if expectations are not met. Potential election-related surprises include BN losing in key battleground states such as Johor, which would severely weaken Najib’s position within his own UMNO party and increase uncertainty around future government policy. Given the inherent difficulty in accurately gauging voter sentiment, and with overall valuations no longer cheap, we recommend taking a selective approach to positioning ahead of the election. Our preferred picks are large-cap names with positive earnings growth trajectories that we expect would remain robust to the most likely election outcomes.

 

Malaysia’s 14th general elections – scenarios and implications
Malaysia’s election machinery is now in high gear ahead of its 14th general election that must be held by August this year. Prime Minister Najib Razak continues to play his cards close to his chest, but the window for the election date is narrowing, with April-May seen as most likely. Multiple factors now at play are likely to work to the advantage of the ruling Barisan Nasional (BN) coalition’s campaign, including strong headline economic growth, recent MYR appreciation, cash handouts as part of the 2018 budget, and redrawing of electoral boundaries. Against this, the opposition Pakatan Harapan coalition has named former prime minister and outspoken Najib critic Mahathir Mohamad to lead its campaign.

A comfortable BN win that sees it regaining a two-thirds parliamentary majority that it lost in the 2013 general election, would likely be seen as positive for the business and investment community, with continuity of existing policies and potential for longer-term structural reforms including changes to the education system to improve the competitiveness of the country’s workforce.

A BN victory that falls short of a two-thirds parliamentary majority is another likely scenario. Within this scenario, there are various potential outcomes that could nevertheless severely destabilise Najib’s position and lead to a leadership challenge from within his own UMNO party. These include defeat for BN in key battleground states such Johor, Selangor (which fell to the opposition in 2008) and Kedah. Such outcomes would likely result in short-term volatility and a re-rating of equity valuations closer to the historical average.

An outright loss by BN is not currently seen as likely, and such a “tail risk” outcome would likely trigger a sharp correction in the equity market as investors assess the future of the country under a non-BN government.

Stick with quality and filter out the noise
Geopolitical risks rarely have a long-term impact on ones portfolio especially if the components of the portfolio are quality stocks.

Our top pick is Genting Berhad (GENT MK), where we see further upside from its ongoing MYR10.4b 10-year master redevelopment programme, known as the Genting Integrated Tourism Plan (GITP), to enhance its pioneer Genting Highlands resort. We also expect improved performance at the group’s Singapore operations on higher gaming volume and non-gaming revenue, and lower bad-debt provisions.

We also like Tenaga Nasional (TNB MK) on improved earnings visibility following the lifting of a major regulatory overhang with clarity released on the regulated rate of returns on its transmission and distribution assets, and revised base electricity tariff for the 2018-20 period. We expect this regulatory clarity to remain robust to most potential election outcomes and would use this opportunity to accumulate the stock.

We remain positive on Gamuda Berhad (GAM MK), where management is guiding for growth in property sales and construction order wins during the year from infrastructure projects.