PETALING JAYA: CGS-CIMB view the current political development amid former prime minister Tan Sri Muhyiddin Yassin resignation and his subsequent appointment as interim prime minister as negative for domestic-oriented sectors such as banks and construction while export-oriented industries should be the least affected.
It said political uncertainty will lead to volatility with downside risks.
“We are of the view that the market is likely to weaken due to concerns over uncertainties on the future leadership and policy direction of the country. In the previous political crisis, KLCI fell 3% or 48 points from Feb 21 to 28, 2020, when the country was run by an interim prime minister,” said the research house in a report.
“Political uncertainties will be negative for domestic sectors like banks, construction, and property as well as stocks with foreign shareholdings. Exporters such as gloves, technology, and plantations sectors as well as defensive sectors will be the least affected.
CGS-CIMB estimated KLCI could potentially trade as low as 3 standard deviation below its forward average PE on political concerns. This would place KLCI at 1,415 points, where the market may bottom.
It said KLCI fell 3% or 48 points during the previous political struggle in February 2020 where it took around six days to appoint a new prime minister.
It said the market, historically, had reacted negatively based on recent major political changes.
“After the 14th general election (GE14) where Pakatan Harapan pulled off a surprise win and Tun Dr Mahathir Mohamad was sworn in as the prime minister, the KLCI fell 4% for a month. The construction and transport sectors were the biggest losers one month after GE14 due to uncertainties on policy direction,” it said.
It recapped, on Feb 24, 2020, Tun Dr Mahathir Mohamad had resigned due to the collapse of the Pakatan Harapan government ruling coalition and the King appointed Tan Sri Muhyiddin Yassin as the 8th prime minister on Feb 29, 2020 and sworn in on March 1, 2020.
“The country was also negatively impacted by Covid-19 during this period. KLCI fell by 3.5% a week after the prime minister took office,” it said.
Meanwhile, Affin Hwang Capital Asset Management believes in cash optionality – reducing some weight for cash would be prudent in this environment for conventional funds coming from a heavily invested level.
In the current circumstances, the firm said technology, retail, healthcare, and manufacturing sectors offer the least political risk although not from a valuation perspective.
“Banks, government linked companies, and politically linked stocks are at risk now due to potential for more national duty given the limitation of our fiscal and monetary policies to stimulate the economy.
“This is a risk and not an eventuality, as a new coalition might not go down this route or it might not be necessary if the economy opens with pent up private sector consumption,” it said.
Affin Hwang said if politics can stabilise combined with economic reopening, there is potential for a 5% to 10% bounce towards the year end.
“We favour reopening plays like banks, retail, property, healthcare. Global growth plays like technology, manufacturing, and digitalisation themes like telco, payment companies,” it said.