More Volatility Post Election

By Richard Lin

Now that the 12th General Election is finally over and a new political landscape has been shaped, it is timely to discuss the possible implications on the economy and financial markets.

Inevitably, some of these political changes will cause disruptions in the economy as selective infrastructure projects and public expenditures announced earlier but which have yet to commence, may be under scrutiny. Surely, the newly appointed chief ministers will reassess the economic viability of certain projects and the awarding of contracts. Hence, several mega projects announced in the state of Selangor and Penang could potentially be delayed. These could involve projects such as water related infrastructure contracts, monorails, bridges, roads and others.

However, on a more positive note, Malaysians could be less burdened by high tariffs if these projects are efficiently planned and executed.

Apart from construction and infrastructure companies, gaming companies will also be affected. The numbers forecast operators particularly Berjaya Sports Toto, Tanjong and Magnum will have to relocate their premises from Kedah now that PAS is on board.

Property players may be affected too, as unapproved property projects and land acquisitions, could also be reviewed.

Sectors seeking for higher tariffs such as cement, steel, water and electricity could be negatively affected while toll hikes may also be tougher to implement, especially since the opposition parties have politicised the issue in the recent elections.

It should be noted that Selangor and Penang both contribute roughly 30% of the country’s GDP and a slowdown in economic activities in these states would affect national economic growth.

As it turned out, Bursa went limit down and triggered the Circuit Breaker when the Composite Index plunged 10% on Monday following the elections. The collapse of the market was compounded by sell-offs of equities by foreign portfolio managers who perceived there could be some political uncertainties arising from the outcome of the election. If this perception becomes a fact, Malaysia may suffer the same fate as Thailand and trade at a wide discount compared with the region.

On Monday, the market was also negatively affected by plantation stocks, which were also sold down viciously due to the sharp correction of CPO and other commodity prices over the weekend. To top it all, regional sentiment was also extremely weak that day with some markets down 2 to 4% due to renewed concerns over the US.

The Malaysian market is now subject to more volatility as foreign equity bourses are expected to remain turbulent while domestic politics may also affect sentiment.

The most notable event that could affect market sentiment would be the forthcoming UMNO general assembly. The market is eagerly awaiting the appointment of Cabinet members, mentris besar and the revamp of MCA, Gerakan and MIC.

As mentioned earlier, equity investors generally do not like political uncertainties, changes in policies and disruptions in economic activities, which could lead to downgrades in earnings. If these domestic issues are not resolved, it could be an overhanging factor clouding the market.

The situation in the US is looking more precarious. The Fed is desperately trying to boost liquidity to ease the strains in credit markets and foster the functioning of the financial system. This is extremely crucial as the US could plunge into a recession if consumption is crimped by the banks’ reluctance and inability to provide credit to consumers. Consumption accounts for two third of the US economy and the US accounts for 30% of world economy. This basically implies that consumption in the US accounts for 20% of the global economy.

The Fed will continue to cut rates but this tactical move will not resolve the credit issues overhanging the financial system in the US. Moreover, latest statistics are suggesting more job losses, which will impact disposable income.

Generally, I am still cautious of the equity market. I believe investors should be patient and wait until the outlook is brighter. I don’t see any compelling reasons why investors should weight up equities now when domestic politics could plague and disrupt economic activities. It should be noted that oil prices have surged to all-time high while the US is heading for a recession. Global inflation will also spike up due to the surge in commodity prices. Why should one rush to invest in equities?


Richard Lin Kwok Wing is the Executive Director / Chief Executive Officer of HLG Asset Management Sdn Bhd.