In line with the base case, the conclusion of the six state elections over the weekend saw the political status quo retained as the Pakatan Harapan-Barisan Nasional (PH-BN) coalition formed the governments in the west coast states of Penang, Selangor and Negeri Sembilan. The lifting of the political overhang will be positive for equity markets allowing investors to refocus on fundamentals. With the anticipated Green Wave reduced to a ripple, investment house RHB believes the Anwar Administration now has ample room to deliver on its promised reform agenda.
While the overall outcome of PRN15 was in line with expectations, a deeper examination of the results offered the following takeaways: i) PH-BN retained the west coast states with reduced majorities – two-thirds majority in Selangor lost, ii) Perikatan Nasional (PN) made inroads into the west coast urban seats and widened its lead in Kedah, Kelantan and Terengganu, iii) This was largely at UMNO’s expense – it won just 19 of the 108 seats it contested and was wiped out in Terengganu and Kedah, iv) Questions will be asked on the credibility of UMNO’s leadership – any changes will have implications for the stability of the unity coalition. While some of the results can be attributed to the low voter turnout and issues of transferability of votes between coalition supporters, the ability of the unity coalition to attract support from the Malay community will be a key issue for the 16th General Election (GE16). There is still time for the Anwar Administration to win over its detractors but it will depend on the effective execution of the Madani economy plans during the remainder of its term.
The house believes the outcome of the state elections offers the Anwar Administration the political leeway to make good on its reform agenda. These initiatives will need to include measures to rebalance the subsidy bill, improve the state of public sector finances, introduce political reform, attract new foreign investment, improve competitiveness, and drive the next phase of growth. Effective public messaging, managing market expectations, and steady execution of the reform agenda will be critical. Near-term milestones to watch out for include the National Energy Transition Roadmap Phase 2 (end-August), the mid-term review of the 12th Malaysia Plan (September) and the tabling of the 2024 Budget in October.
Greater political and macroeconomic clarity – in line with RHB’s view – will be tailwinds for equity markets. Valuations are not especially demanding, at 14.2x FY24F P/E. However, key risks impeding the headroom for equities include fragile corporate earnings, weak MYR/USD rate and the uninspiring pace of economic recovery in China. Robust fundamentals are a key investment consideration, and market weakness should be seen as an opportunity to gradually deploy cash hoards to add to equity positions to take advantage of Bursa Malaysia’s laggard status. RHB has OVERWEIGHT calls on the banking, oil & gas (O&G), utilities, basic materials, non-bank financial institutions (NBFIs), healthcare and property
