SocGen: Why we aren’t buying Malaysian stocks before the election

Malaysia ringgit notesMalaysia ringgit notes

Malaysian equities have begun to outperform ahead of the election, but there’s not much of a longer term reason to buy, Societe Generale said in a note on Friday.

“Malaysian equities have started to outperform on the back of the uptick in the oil price, foreign inflows and favourable currency move, ending the two-year underperformance relative to Asia,” the bank noted, but it added, “Even if the political uncertainty should abate post the upcoming general elections on 9 May, there are limited triggers for equities to continue to move higher in the medium term in our
view.”

It noted that Malaysia’s stocks have a high correlation to the oil price, but the bank’s commodity team said crude’s recent rise is largely due to geopolitical risks, such as Iran sanctions and Venezuelan production declines, while the fundamentals haven’t changed much; it was sticking with an average price of US$66 a barrel for this year, which it expected would “constrain” Malaysian equities.

While SocGen expected the election would clear political uncertainty, it wouldn’t necessarily boost the economy much.

“We think the boost to the economy from consumption, due to increased public spending ahead of the elections, will gradually fade post the elections due to high household leverage (amongst the highest in Asia),” it said. “The recovery in economic growth has not translated to credit growth, which is still lingering at a low single-digit 4 percent. Export growth, though still robust, is showing early signs of tapering.”

The risk-reward is better elsewhere in Asia, as well, the bank said, noting consensus earnings growth forecasts an 8 percent rebound in Malaysia this year, led by financials, ending five years of no growth, but that’s slower relative to regional peers. It said within Southeast Asia, it preferred Indonesia and Thailand, where economic growth looks more durable, while South Korea remained its key overweight in Asia ex-Japan.

 

The KLCI ended Friday up 0.6 percent at 1863.47, totting up an around 3.7 percent gain so far this year.