Research house says investors expected to remain sidelined

PETALING JAYA: UBS Global Research has deemed the outcome of GE14 as negative for the Malaysian equity market due to uncertainties over the transition of power and possible changes to existing policies and contracts.

“As investors dislike uncertainty, we expect the market to sell down first as investors wait for the situation to play out over the coming weeks (and possibly months),” it said in a report.

The research house noted that the key questions on investors’ minds would be whether there will be a peaceful and smooth transition of power from outgoing coalition Barisan Nasional to Pakatan Harapan, and if the new coalition will be able to ensure a stable and effective government.

Investors would also need to know whether there will be changes to the government’s existing policies and contracts, it said.

It noted, however, that the leadership of Pakatan comprises many former Barisan leaders, and as such, policies were unlikely to significantly differ.

“Until we have clarity, we expect investors to remain sidelined and we see a period of high equity market volatility.

Due to this uncertainty in the near term, the research house expects that market price earnings could derate from the current 16.1 times (+1 standard deviation) to between -1.5 and -0.5 standard deviation (FBM KLCI range of between 1,504 and 1,655 points), as investors digest the implications of a new government over the coming weeks.

Particularly vulnerable stocks, it said, were those which have high foreign ownership and/or have strongly outperformed the benchmark indices over the past six to 12 months.

For investors needing to hold on to Malaysia, the research house said it sees defensives stocks that are not as susceptible to near-term policy shocks doing relatively better such as utilities, consumer staple and yield plays, while exporters and the plantation sector are also expected to hold up better.

Its preferred list comprises IHH Healthcare Bhd, Sime Darby Plantation Bhd, Axiata Group Bhd, British American Tobacco (M) Bhd and Petronas Chemicals Group Bhd.