We found that the historical performance of the KLCI in May has been mixed, registering average mom negative return of 0.1% over the past 10 years and posting positive mom declines in five out of the past 10 years. However, over a 40-year period, it posted an average mom gain of 1.4%.
On the local front, investors will be closely tracking the results of GE14 on 9 May 2018. To recap, Malaysia’s Prime Minister dissolved the parliament on 7 April (Saturday) and the polling date will be on 9 May 2018 (Wednesday). The government has also declared 9 May as a public holiday.
FBM KLCI performances before and after General Elections (click to enlarge)
The 11-day campaigning period for GE14 has started following nomination day on 28 April 2018 (Saturday). According to press reports, 687 candidates will be vying for the 222 parliamentary seats and 1,646 candidates will be eyeing the 505 state seats. This represents an increase of 20% compared to GE13. This time around, ruling coalition Barisan Nasional (BN) has fielded candidates in all 222 parliamentary and 505 state seats, while the Opposition coalition Pakatan Harapan, under the banner of PKR, has placed its bets on 191 and 448 candidates for both parliamentary and state seats respectively. Meanwhile, PAS becomes the third leading contender in GE14 by fielding 158 candidates for parliamentary and 393 for state seats.
A recent presentation by Merdeka Centre on 26 April 2018 to the press, revealed that although there is a swing of Malay support towards Pakatan Harapan in certain states, it will not be sufficient to put the opposition coalition in power. He added that for Pakatan Harapan to take Putrajaya, it needed 14% more Malay support in addition to its current 20%. The centre also predicted that the opposition would retain Penang and Selangor comfortably, but would be unlikely to see much gain in other states. The survey was conducted among 1,206 voters across all states of Peninsular Malaysia, Sabah and Sarawak through telephone interviews between 3 and 9 April.
Since the dissolution of parliament on 7 April 2018, the KLCI has gained 1% to 1,870 points as at 30 April 2018. We predict that market will remain volatile until the election and the results of the election could depend on turnout rate, how successful the candidates are in persuading the undecided voters and the outcomes of the three-cornered fights in many seats in GE14 following PAS’s departure from the opposition coalition after GE13, which is expected to split the Malay opposition votes.
We believe the stock market performance immediately after elections will be largely determined by 1) the degree of selling pressure during the campaigning period and 2) the actual polling results. If selling pressure is intense in the few days before the polls, it would mean that most of the potential bad news would already be factored in the share prices. Also, the market is likely to stage a relief rally if the incumbent wins, leading to continuity of existing policies. However, if polling results were in line with market expectations and there were no selling pressures prior to the polling date, we expect the KLCI performance post polling results to be muted and to be driven largely by external events.
Based on the past eight election results, our analysis found that the market tends to perform better, on average, post general elections than pre-general elections. The exception was in 2008 when the market fell post GE, due partly to the global financial crisis and in 2004 when the market succumbed to profit- taking following its strong performance pre-GE. (Figure 16)
Apart from GE14, investors will be tracking the 1Q18 results of Malaysian corporates in May, where banks in Malaysia will reveal the impact of the new accounting standard MFRS9 on their earnings. Plantation companies are expected to see weaker earnings in 1Q due to lower CPO prices. On the macro front, all eyes will be on the 1Q18 GDP figure due out on 17 May 2018. We are projecting 1Q18F GDP for Malaysia to come in at around 5.4%.
One of the key events to watch out for in the international market is how the ongoing trade spat between the US and China develops. The US Retail Federation, Consumer Technology Association and other trade groups have been working together and separately to lobby the US administration to strike a deal with China that avoids tariffs, and otherwise to exclude specific products from the list. Companies are making requests to have products removed
or added, with a public hearing set for 15 May in Washington.
Another event to watch is the development in the crude oil market and its impact on crude oil prices. Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), re-emerged as a major oil exporter in January 2016 when international sanctions against Tehran were lifted in return for curbs on Iran’s nuclear programme.
The United States, however, has expressed doubts over Iran’s sincerity in implementing those curbs and President Donald Trump has threatened to re- impose sanctions. If US President Donald Trump decides to reimpose sanctions on Iran on 12 May, it may lead to a removal of more than 1 mbd of crude oil supplies or 1.4% of global oil demand. This may trigger a very strong upward movement in oil prices.
The Federal Open Market Committee (FOMC) is set to meet on 2 May 2018. Most investors are not expecting the central bank to tighten its policy. We maintain our end-2018 KLCI target of 1,880 pts which is based on 15.9x 12M forward P/E. We have also identified the consumer and construction sectors as potential winners from BN’s GE14 manifesto. We maintain our top three picks for Malaysia, which are Axiata, Dialog and Westports.
FBM KLCI Monthly Chart (click to enlarge)
Technical outlook for the longer term
Based on the last three stock market crashes (1987 Black Monday, 1997 Asian Crisis, and 2008 Global Crisis), it looks like a crisis ‘happens’ once every 10- 10.5 years. The current situation, where the FBMKLCI index has broken out of its triangle formation, is similar to the triangle breakout that took place during the 1997 Asian Crisis.
If history repeats itself, the current movement would likely have trouble taking out the all-time intra-day high of 1,896. 1,708 is the critical support level and a decisive breach below this level suggests that the 10-year cycle bearish phase is likely under way. Price movements in the next few weeks or months would likely give us a better idea as to which direction the market will take for the future.
source: CIMB Research – 02/05/2018
