Hold your horses: Political risk premium still lingers in Malaysian equities

WHILE great hopes are pinned on Datuk Seri Anwar Ibrahim’s journey to bridge the country’s divide and tackle structural socio-economic challenge, investors must bear in mind that the capital market will first has to assess the 10th Malaysian Prime Minister’s (PM) ability to consolidate his support in Parliament while forming a strong and respected Cabinet.

“Until the country attains reasonable political stability, the FBM KLCI would likely be commanding ‘sub-optimal’ valuation, and could be closing at below historical mean for the second consecutive year in 2022,” cautioned UOB Kay Hian Research’s head Vincent Khoo in a strategy note.

The research house further expects Perikatan Nasional (PN) to remain a formidable opposition coalition, especially with coalition partner PAS having emerged the party with the most parliamentary seats (49) in the recently concluded 15th General Election (GE15).

However, it has to be noted that PAS secretary-general Datuk Seri Takiyuddin Hassan – in conveying his congratulation to Anwar earlier today – has mentioned that PN would consider the offer by Anwar to join his unity government.

“Islamic party PAS has also won the Perlis state, adding to its northern/coastal states portfolio (Kelantan, Kedah, Terengganu) and extending its presence to Pahang. PN could have control of Pahang and Perak had PH not teamed up with BN in those states,” opined UOB Kay Hian Research.

“PN is expected to challenge Anwar via invoking a vote of no confidence in parliament on Dec 19.”

Moving forward, the research house has upgraded the previously impacted sin sector to “overweight” again.

“As the emergence of a unity government has snuffed out fears of sin sectors being affected by adverse regulation, investors will re-focus on the promising growth outlook and depressed valuations of the gaming and brewery stocks,” projected the research house.

“However, we have become more neutral on the NFO (number forecast operator) stocks given the lack of growth beyond 2023, and their high prospective (7%) dividend yields may not sufficiently re-rate the stocks.”

UOB Kay Hian Research has also “tentatively trimmed” its end-2022 FBM KLCI target to 1,550 from 1,585 (end-2023: 1,640) although “positively, we continue to expect the FBM KLCI to trend up towards year-end to re-joining the global equity uptrend as US core inflation eases”.

Elsewhere, Bloomberg reported that the ringgit jumped this morning, making the currency the best performer in the region for a second day following Anwar’s appointment as Malaysia’s new PM.

The local currency rose by as much as 0.9% against the greenback to 4.4542, its strongest level since mid-August. The currency had surged by 1.8% after Anwar’s appointment on yesterday (Nov 24), the largest single-day gain since March 2016. – Nov 25, 2022


Main photo credit: The Edge Markets

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