Introduction

Malaysia General Election

Since its independence in 1957, Malaysia has held 13 general elections. Our country has a parliamentary system of government, and the Prime Minister is the head of government. The last general election was held on May 9, 2018, and the next will be held on November 19, 2022. A general election is a significant event in Malaysia as it determines the composition of the government and the policies that will be implemented. It also has an impact on the country’s economy, specifically the stock market. In this article, we will take a look at the historical effect of political elections on the stock market in Malaysia. We will also examine the factors that contribute to the market’s performance in the lead-up to and aftermath of an election.

Source: Wikipedia.

Key takeaways

• A change of government that results in policy changes will bring instability to the market.
• Two days before the 13th General Election, FBMKLCI fell 22.88 points. However, the day after the election results were revealed, the FBMKLCI rose 16.7%, reaching all-time highs, up 96.29 points.
• In the 13th General Election, the sectors benefiting the most are financials and trading services firms.
• Two days before the 14th general election, the FBMKLCI rose only 3.4%, while the FTSE Malaysia small Cap index was down 14.1%. After the 14th political tsunami, the Malaysian financial market became highly volatile.
• Government-linked stocks in the 13th general election are CIMB (1023), Petronas Gas Berhad (PGB), UEM Land, DRBHcom (1619), and SAPNRG (5218).
• Government-linked stocks in the 14th general election are GKENT (3204) and MYEG (0138).
• Oil and gas stocks are relatively stable and less affected by politics in the short term.

Description

According to the past general elections held in Malaysia, empirical evidence suggests that election effects have a significant impact on the stock market. This is because investors will either have more confidence or less confidence in the future of the economy depending on the results. In Malaysia, the Bursa Malaysia has seen several ups and downs in recent years in political elections. For example, the market rose sharply in the lead-up to the 2018 general election as investors anticipated a win by the ruling party. However, it plunged soon after the election when it became clear that the opposition had made significant gains. In this study, we will focus on the impact of the 13th and 14th general election in Malaysia to the stock market.

General Election and Stock Market Performance

Investors are frequently interested in finding irregularities in the stock market that occur when political elections garner a lot of sustained attention from the public. The political climate is one of the most important factors that can affect how well a country's stock market performs. A change of government that results in policy changes will bring instability to the market. If there is a change in government or policymakers, the market may have doubts about whether some companies will be able to keep up their profit performance. The stock market is a significant measure of national economic performance. Therefore, any changes in policy, be it monetary or fiscal, may affect the direction of the stock market. Some studies have shown that in developed countries, large political events led to an increase in stock market volatility.

The significant effect of Political Elections on the Stock Market in Malaysia

In the general elections of 1995, 1999 and 2004, BN (Barisan Nasional) won the majority of parliamentary seats. Despite this, political instability was evident in the 2008 and 2013 elections when opposition parties formed coalitions and gained significant followings.

Aside from political instability, there are also some companies linked to political figures that could trigger investors to change their strategies and buy or sell more aggressively because of election results. These companies and stocks are known as Malaysia's political concept stocks which include government-affiliated companies, companies related to political parties, and franchise operators.

Potential impact of the 2013 (13th) general election on Malaysia's stock market

Source: KLSE

On 3th May, two days before the election, FBMKLCI fell 22.88 points. This was likely because of the unstable political situation at the time and investors were worried that the ruling party might lose to the opposition. However, the day after the election results were revealed, the FBMKLCI rose 16.7%, reaching all-time highs, up 96.29 points. This showed that investors' confidence had been restored.

Source: KLSE

In 2013, which was the 13th national election, the industry sector had the best performance in the year leading up to the vote, with the Malaysian stock index rising by 23.4%. One month after the election, this trend continued, with the index rising by 24%.

Then came the Construction index, which rose 11.4% and 16.6% respectively. Followed by health care, which increased by 13.6% and 5.8%, respectively. The transportation sector was the only one that could not afford to reverse its decline, falling 15.1% one month before the election and rising 16.7% the month after.

The sectors benefiting the most are financials and trading services firms. CIMB (1023), headed by Najib's younger brother Datuk Seri Nasir Sakaran rallied over 7%. Besides, state-owned Petronas Gas Berhad (PGB) surged over 14% while property developer UEM Land rose 10%. DRBHcom (1619), owned by privatisation tycoon Tan Sri Syed Mokhtar AlBukhary, who has close ties to the government and SAPNRG (5218), owned by former Prime Minister Tun Razak Mahathir's second son Datuk Mozani Mahathir also get affected by the election.

If power were to transfer hands, which means if the opposite ruling party won the election, it would have a significant effect on some related stocks such as ASTRO (6399), as well as essential areas like food, medicine etc. Furthermore, "unfair" contracts for independent power plants (IPP) will be restructured, and the Expressway Corporation will be forced to gradually reduce its tolls. Also, construction companies with existing contracts for the MRT project may have their contracts re-evaluated, delaying the operation of the project. The Integrated Refining and Petrochemical Development Plan (RAPID) related to the oil and gas sector will also be reviewed.

Overall, the sectors of the Malaysian stock market performed well before and after the election in 2013. The global economy was still recovering from the bottom, and the Malaysian economy was also doing well. Therefore, all sectors of the Malaysian stock market have achieved bright and beautiful results.

Potential impact of the 2018 (14th) general election on Malaysia's stock market

Source: KLSE

At 92 years old, Mr Mahathir unseated the Barisan Nasional coalition, which had been in power for 60 years. Two days before the 14th general election, the FBMKLCI rose only 3.4%, while the FTSE Malaysia small Cap index was down 14.1%. After the 14th political tsunami, the Malaysian financial market became highly volatile. After Pakatan Harapan's historic victory, the FTSE Kuala Lumpur Composite Index fell sharply. The index showed that there would be new policies after the change of government, and the cancellation of old policies would cause uncertainty and instability in the market.

Source: KLSE

Though short-term volatility might come from the lack of clarity surrounding Malaysian politics venturing into "unknown territory", analysts insist the long-term outcomes are optimistic. Some of the opposition's campaign promises, such as repealing the Goods and Services Tax (GST), would have a negative impact on the country's credit rating.

Before the election, most construction stocks are anticipated to benefit from the government's large infrastructure projects. But after the election, the construction and cement industries are facing scrutiny as the new government plans to re-evaluate all major infrastructure projects in Malaysia. Some notable infrastructure projects include a High-Speed Rail (HSR) system connecting Kuala Lumpur, Johor and Singapore which was a project proposed by Malaysia's sixth Prime Minister, Najib Razak. However, Mahathir Mohamad, who leads the opposition party Pakatan Harapan raised doubts about the project's financial viability. This will have a negative impact on construction companies such as Malaysian Resources Corp, Gamuda Bhd, Sunway Construction and YTL Corporation Bhd.

To add on, due to the results of the election, government-linked companies such as GKENT (3204) and MYEG (0138) experienced great losses. George Kent's stock price took a beating from the pre-election high of RM3.94 all the way down to RM1.40, a staggering 65% drop. As of 25 May 2018, the company was trading at a P/E and P/B of 6 and 1.6, respectively. While MYEG Berhad's stock price has continued to decline until it hit the limit down.

Oil and gas stocks are relatively stable and less affected by politics in the short term. Regardless of which party is in power, it is believed that the Petroliam Nasional BHD (PETRONAS) will continue to operate as usual, depending on peripheral factors such as international crude oil prices. Oil and gas sectors are expected to benefit from the recent stabilisation in crude oil prices. After the election, export counters were the winners among all industries as the new government proposed the abolishment of the GST (goods and services tax). But inversely, the removal of GST will reduce the government's revenue base and hence it could have a negative impact on Malaysia's sovereign rating and cause the ringgit to depreciate. However, the drop in the Ringgit benefited Malaysian exports. Some of the commodities exported from Malaysia are electronic equipment, petroleum and liquefied natural gas, wood and wood products as well as rubber.

The bottom line

In general, the Malaysian stock market is volatile, and investors' behaviour is highly related to the country's political situation. If a country's political situation is stable, investors are optimistic about the economic outlook, and they will also be more likely to invest in the stock market. However, when the political situation is unstable, market participants, especially overseas investors, tend to withdraw from the market. They become more cautious about risks. Investors may seek unusual returns around the time of the election, which can cause short-term volatility in the market. However, investors need to keep an eye on the current political situation and don't forget other macroeconomic factors that may affect returns in an election year.

References

• 大选牵动股市. (n.d.). Klse.i3investor.com.
• 政治概念股. (n.d.). Klse.i3investor.com.
• 大选催化马股牛市？. (n.d.). KLSE Screener.
• Chandran, N. (n.d.). Malaysia Stocks Hit Record High After Elections. CNBC.
• Winner and Loser Stocks after Malaysia Election. (n.d.). Klse.i3investor.com.

Author

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This article is written by Dion Chai, Research Analyst

Dion Chai is a fresh graduate student majoring in Finance and Investment in Tunku Abdul Rahman University of Management and Technology (TAR UMT). Dion once participated in the CFA Research Challenge and Trading competition organized by Malaysian Finance Expert Convention 2022. She is an in-house author from TED Optimus.