Friday, March 15, 2013

Malaysia Equity Strategy

Election is the most talked about subject matter. How should we view Malaysian equity? Will the election result matter in the end?

Fact: Retail players and to a lesser extent local funds, have been avoiding or exiting their holdings for the past 3 months despite bouts of uptrend in the local bourse.

Fact: Foreign funds have been net buyers for the past 3 months. You wonder if they know something we don't.

The confidence exhibited by foreign funds in local shares may be due to the way they view how politics affected Thailand. That country has had more riots, protests rallies and change in government for the past 10 years than all Asian countries combined, I think. Yet the equity market there has shown a strong performance albeit with bouts of minor volatility with each "eventful event". Asian equities are not expensive, but they are no longer outright cheap, except for Malaysia comparatively.

How different is Malaysia from Thailand? I think there are more similarities than differences. 

If we have a change in government, what will be main causes of a market meltdown? One, there is a prolonged and difficult transition of power. Will that happen? Rightly or wrongly, the over-riding view is that there will not be a change in government if the Malays do not want one. If there is a change it would be because they do, and being part of the new majority, it is highly unlikely that the police or army may make the transition of power difficult.

Two, if there was to be a dramatic reneging of contracts or reversal of corporate deals. This is critical as that erodes confidence of contractual obligations. Thats akin to Hugo Chavez or Fidel Castro nationalising whatever they like and whomever they want to punish. I think there are enough brain smarts in Pakatan to know that its not the right path to take. Witch hunting is also a no-no for confidence, which Anwar has said that there will be none of that.

Fact: Malaysian equity has basically been left out from the massive equity rally globally for the last 4 months, owing to election uncertainty which has distracted local investors and deterred them as well. The belief among most foreign funds investing in Malaysia is that Malaysia will be playing a lot of catching up when the election is over - whatever the result may be.

Malaysia looks interesting to foreign funds given its recent under performance but the only decision regional investors will make is NOT whether to buy Malaysian stocks  BUT when to buy. This is beginning to look a lot like a similar wave of foreign funds coming in early when the locals are shunning the markets. After the election (regardless of the outcome), the Malaysian market rallies ... and guess what, the local retail and local funds jump in with gusto, helping to take out the foreign funds above 1700. Sounds familiar?

Seriously, if BN retains, the markets may rally but only a little because there's nothing new. If Pakatan comes in, there will be a mini knee jerk reaction, around 20-40 points, not much, because folks, much of what's going to happen IS IN THE MARKET already. As dumb as we like to paint foreign funds, they are actually quite savvy about things. Hence, my view is that after a swift initial small bout of downside, a Pakatan victory will propel the local bourse a lot higher and more sustainable too.

Why? The presumed better corporate governance, the presumed better management and allocation of resources, a more transparent way of doing things. Watch FDI comes in big waves as there are many who will regard it as a "welcome mat" - do you have any idea how many funds, stock investors and longer term FDIs have chosen to bypass Malaysia because of you know what ...

Rest assured, those "good plans" such as Iskandar will still get the go ahead with Pakatan. The speed rail from Singapore will still go on albeit with some changes, and a much much open tender process. Here is my opinion of the markets with the following scenario:

For the rest of 2013

BN retains but smaller majority:  1620-1730 (20%)

BN retains with a bigger majority: 1620-1760 (5%)

Pakatan wins with majority of less than 10 seats:  1580-1800 (45%)

Pakatan wins with a majority of more than 10 seats: 1580-1850 (30%)

For the differing scenarios, I have also assumed various likelihood in % out of 100. The 4 scenarios adds up to 100. Naturally this is just my view, and takes into account gerrymandering and potential voting issues raised by Bersih, hence this is not an ultra positive or whitewashed view.