• Political scenario post-GE13 is expected to remain stable
• Post-GE13 ‘relief rally’ is not unexpected but must be anchored to fundamental considerations
• FBM KLCI already re-tracked earlier lost ground relative to regional counterparts
• Only rapidly rising expectations or sheer liquidity can sustain FBM KLCI well beyond current levels
• Anticipate reduced political risks and slight upward-bias to earnings expectations
• Hence adjust our FBM KLCI 2013 year-end target to 1,800 points
13TH GENERAL ELECTION
Election outcome is not unanticipated. On page 13 of our “2Q13 Outlook: A Nation Decides” dated 1 April 2013, we forewarned of the following outcome to the GE13:
Potential unintended consequence of the GE13. The main unintended consequence of the GE13 if the incumbent retains power, as implied by the opinion polls, is that the federal government would be meaningfully represented by only 2 ethnicities. In this instance, the Sarawak 2011 state election scenario may be repeated at the national level. It seems that, by accident, the nation might be heading towards a two-race system as opposed to the intended twoparty system. The possible impact on the people’s nation building will not likely be positive over the long term.
National reconciliation to counter possible negative impact. But we are thankful that the returning government promptly takes full cognizant that efforts should be made towards national reconciliation to counter the possible negative impact of GE13 voting trends on the people’s nation building.
Expect PM Najib Razak’s party position to be safe... We reckon the position of PM Najib Razak as the head of UMNO (the backbone of the ruling coalition) will be secured pursuant to the just concluded election. His party managed to (i) improve on its parliamentary seat counts (GE13: 88 seats; GE12: 79 seats), (ii) wrest control of the state of Kedah, and (iii) single-handedly (UMNO won more than half of total state seats) retain control of the state of Perak.
…hence broad political scenario should remain relatively stable. Hence the broad political scenario post-GE13 is expected to remain stable. This is despite the ruling coalition having secured fresh federal mandate with a lesser overall parliamentary majority (GE13: 133 seats) as compared to earlier election (GE12: 140 seats) in 2008. It is important to note that for as long as the internal cohesion within UMNO remains intact, the stability of the ruling coalition government can be highly assured.
STATE OF THE MARKET
FBM KLCI earlier suffered from ‘pre-election discount’... Recall that, in mid-January, the FBM KLC was bashed down by bouts of selling likely triggered by jittery investors who were worried the GE13 would unfavourably alter the political status quo. Consequently, the local benchmark decoupled with the rest of the regional markets attested by its gaping ‘pre-election discount’.
…but already re-tracked lost ground relative to regional counterparts, and more. Nonetheless in our strategy report dated 22 January 2013, we alluded to the empirical market behaviour that, “While the local market performance may temporarily decouple from the rest of the region, it would soon re-track the broad regional trend direction.” In its true fashion, by early May, the FBM KLCI successfully re-tracked the broad regional trend direction. Furthermore, the post-GE13 ‘relief rally’ has more than erased earlier lost ground relative to its regional counterparts.
THE GE13 AFTERMATH
Taming the undercurrent is a priority. On the surface, the just concluded GE13 has resulted in only slight alterations to the political status quo. But beneath the seat counts, the voting trends arguably portend to a weakening in societal cohesion. Nonetheless we believe the overall political scenario to remain calm as we doubt not the government’s resolve and ingenuity to tame the undercurrent.
Status quo helps to keep government initiatives on track. On the economic front, the maintenance of political status quo would help to keep on track the multitude of on-going as well as planned ETP and related projects. Besides, the much clearer political visibility post-GE13 would also help private businesses to execute their plans as well as to continue on planning ahead. Thus, while it is too early to quantify, we are foreseeing a slight upwardbias to the prevailing consensus of corporate earnings expectations. This would help to potentially raise the valuation-based ceiling of 1,790 points for the FBM KLCI in 2013.
Slight improvement in earnings may commensurately be reflected in market performance. Nonetheless a slight upward revision to earnings expectations alone may not be adequate to propel the FBM KLCI into an extended cycle during the remainder of this year. We are inclined to believe that the local benchmark would conform to a normal cyclical path hence ending the year circa 1,800 points at best.
Liquidity equation is a wild-card. Having said that, an abrupt change to the liquidity equation is a wild-card that may upset even the best laid out fundamental arguments. At this moment however, we are assuming that the market liquidity situation is going to remain (i) supportive in quantity, but (ii) measured in intensity.
Investment strategy. So far this year, it has been a rather fruitful 2013 to the world’s equity market. But at the same time, we are also wary of possible short-term cyclical correction after the roaring start to the year. Hence we continue to recommend a portfolio with combination of stocks with:
(i) inherent earnings quality,
(ii) good earnings growth potential, and/or
(iii) attractive valuation. On sectorial basis, we continue to like Construction, Oil & Gas, Healthcare, Power and Semiconductor.
FBM KLCI YEAR-END TARGET
Adjust FBM KLCI year-end target to 1,800 points. An adjustment to our market target is warranted post-GE13 due to
(i) reduced political uncertainties, and
(ii) slight upward-bias to corporate earnings expectations. We thereby adjust our FBM KLCI 2013 year-end target to 1,800 points. This reflects a PER13 of circa 16.4x, which is 1.0 standard deviation above the 6-year average, starting from pre-Financial Crisis days. Earnings growth (adjusted) for 2013 is expected at 3.5%.