KL election fever sparks volatility

THE regional spotlight has been cast on Malaysia stocks amid rising election fever triggered by the dissolution of Parliament on Wednesday.

That attention looks set to surge in the coming weeks as investors try to profit from the likely rise in volatility.

Overseas interest has already been gaining pace.

Last month, foreigners bought a net RM4.7 billion (S$1.9 billion) worth of Malaysian stocks – the highest since at least October 2009.

Analysts attribute this surge to institutional investors upgrading their Malaysia country allocation from “severe underweight” to “slight underweight”.

These investors believe that election risks are mostly priced in while valuations in other Asean markets seem relatively rich.

“We would not be surprised if investors took money out of other Asean markets which have done well, and re-allocate to Malaysia,” noted Deutsche Bank.

Market experts say the sudden surge in fresh funds may be caused by investors switching from Malaysian fixed income to stocks.

The hint of election-sparked market turbulence was evident on Wednesday after Prime Minister Najib Razak dissolved Parliament.

Malaysian stocks plunged as much as 3.1 per cent during the day before ending flat, with volatility soaring to a one- month high.

During the last election, in 2008, trading was suspended for an hour on March 10 – the first session following the dramatic poll results – to impose calm.

Panic selling drove the Kuala Lumpur Composite Index (KLCI) down 9.5 per cent that eventful day – its worst one-day showing since a 21 per cent meltdown during the Asian financial crisis on Sept 8, 1998.

Analysts expect uncertainty ahead with most tipping the elections to be held near the end of this month.

TA Securities noted: “Trading post-dissolution of Parliament is expected to stay choppy, with selling on strength and buying on dips likely to contain the index within a range.”

It added that any rally attempts towards the 1,699 record high seen in January will likely be met with strong profit-taking and selling interest. The KLCI is trading around the 1,685 mark.

It advised investors to cash out from overvalued blue chips and buy these back on weakness after the dissolution, since a win by ruling coalition Barisan Nasional (BN) could spark a rally.

CIMB analyst Terence Wong urged investors to stay on the sidelines as election risks could weigh down the market.

He noted the selling pressure during the Sarawak state election in 2011 due to widespread concern about the poll outcome.

“This time, the stakes are even higher, and therefore, the impact could be magnified,” he added.

CIMB’s pre-election preference is to stay defensive and look at high-yielding, non-cyclical sectors such as brewery, real estate investment trusts and utilities.

Mr Wong said: “Post-election, we are likely to turn more bullish.”

The spotlight is now on politically sensitive stocks.

Deutsche analyst Joe Liew predicts a “status quo” election outcome, tipping BN to keep about 60 per cent of parliamentary seats.

Deutsche’s top five election buys are CIMB Group, Maybank, Tenaga, UEM Land and Gamuda, noting that these stocks are trading at valuations below historical averages.