The conclusion of the state elections by August, in which RHB Research (RHB) expects the status quo to be maintained, will see political risks ease to allow room for the Pakatan Harapan-led administration to implement its reform agenda.
RHB’s positive view on the prospects of global growth and the peaking of the US interest rate cycle will be helpful for emerging market risk assets, even as investors start to look ahead into 2024.
“A near-term core defensive strategy remains appropriate, although investors should capitalise on opportunities to accumulate quality stocks on weakness,” said RHB in the recent Malaysia Strategy Report.
Despite the unity coalition enjoying a two-thirds parliamentary majority, the political climate since the conclusion of the 15th general election has been nothing less than tense.
The unity government construct is unprecedented considering the disparate political ideologies, coupled with persistent agitation by the opposition.
The coming state elections could be a watershed for equity markets, as the tone of the poll results will be a gauge of popular support for the unity coalition and influence the quantum of political will available to implement reforms.
“Our base case scenario is for the political status quo with the unity government coalitions to retain control of Penang, Selangor and Negeri Sembilan,” said RHB.
The pace of reforms post-elections will be key to establishing market confidence on how structural changes will evolve going forward.
RHB Economics expects the global macroeconomic recovery to commence in 3Q23, and noted the early signs of a bottoming-out in trade, industrial production, retail sales and Purchasing Managers’ Index data in many major economies in Asia ex-Japan.
Asia is the factory of the world, so the aforementioned signals already suggest that green shoots are here, and that these will blossom in the near term.
“Our leading indicators of global growth suggest that a rebound in global industrial production has already commenced, and will gather further strength in the next few months,” said RHB.
The wealth effect from a sustained rise in global stock and housing markets will impact consumer spending positively in major developed market and emerging market economies.
Equity markets will likely be volatile in the run-up to the state elections. Greater political and macroeconomic clarity, in line with RHB’s view, will be tailwinds for equity markets, and lift investor sentiment.
While valuations are not especially demanding, at 13.6x FY24 Price-Earnings Ratio (P/E), the relatively fragile corporate earnings are a drag on equities, as is a persistently weak USD/RM rate.
Robust fundamentals are a key investment consideration, and market weakness should be seen as opportunities to gradually deploy cash hoards to add to equity positions to take advantage of Bursa Malaysia’s laggard status.
“We have OVERWEIGHT calls on the bank, oil & gas, utilities, basic materials, non-bank financial institutions, healthcare and property sectors,” said RHB.
