Nowadays, hung parliament seems to be an increasingly common trend, with several countries in the world like UK, Germany, Italy and New Zealand ending their recent election with no single political party winning an overall majority.
On top of that, in the past couple of years, given the few black swan events like the Brexit and Trump presidential victory, investors should always be prepared for any possibilities in the coming General Election 14 (GE-14).
Although many are expecting that the current ruling government is likely to extend its 60 years grip on power in the coming GE14, we should not rule out the possibility of other plausible outcomes such as a hung parliament or the opposition victory. In this article, we would like to discuss what would be the impacts arising from a different election result.
Scenario 1: BN’s Election Victory
In fact, an election victory for the current ruling government – Barisan National (BN) would be the base case scenario for most of the analysts or fund manager. As we all know, the equity market dislikes uncertainty whether is regarding the fundamental of the economy, policy or the political uncertainties. Hence, given such expectation, if BN is able to retain its federal power, we might see a relief rally in the local equity market in the following day.
However, the strength of the market rally would depend on whether the BN is able to regain a two-third majority seats. An unexpected two-third majority win by the BN would be a strong short-term catalyst to the local equity market as we might see stronger foreign investors’ confidence due to the political stability and policy continuity coupled with the still strong economic fundamental. Therefore, with the continuing foreign inflow, the prospect of the local currency is likely to be supported in the short to mid-term perspective.
However, to a certain extent, we believe that the positive factors might have factored in as the Ringgit has strengthen 3.8% on YTD basis and the local equity market as represented by FBMKLCI Index, has strengthen about 1.9%, to record high level, since the announcement of polling date. Hence, the post-election rally might not be as strong as what we have seen in 2013.
Scenario 2: Opposition Win
Over the past 60 years, since the declaration of Malaysia independence, we have never had a change of government. Hence, the sudden change of a new ruling government will definitely create certain level of uncertainty from the political and policy front. Having said that, we are likely to experience an impactful sell-off in the local equity market, as most of the investors especially the foreign investors would stay away from the equity market in order to wait for a greater clarity.
However, for mid to long-term perspective, we do not foresee any significant impact on the local equity market, given that the current solid economic fundamental is likely to remain unchanged. On top of that, an opposition victory might bring upon fresh policies to ensure more prudent government spending and more transparency which will eventually result in a stronger economy.
Investors should be aware that an opposition victory might not be favorable to some government linked companies (GLCs). Reason being, most of the previous mentioned projects would likely be reviewed and suspended, causing a mid to long-term impact to the business prospect of these GLCs. Hence, investors should expect sell-off in GLCs should the opposition victory were to materialize.
Scenario 3: Hung Parliament
Lastly, hung parliament could be another outcome for the coming GE-14 and this would be the worst-case scenario that most of us might not want to see. In Malaysia political science, hung parliament refers to a fragmented parliament with no single political party winning an absolute majority of 112 out of 222 seats in the elected Dewan Rakyat.
In the case of hung parliament, we would have to go through a protracted period of political negotiation in order to finalize a political leader that is acceptable to both parties. Definitely, we would see heighten volatility and uncertainty which will ultimately translate into a severe sell-off in the local equity market.
Reason being, the formation of hung parliament might cause most of the decision making and previously well-planned project to take a back seat, affecting the effectiveness of the government and prolong the time of getting things done. As a result, the local economy and corporate earnings are likely to take a hit, leading deteriorating foreign investors’ confidence and a sharp foreign fund outflow.
All in all, as we are not the expert from the political realm, it would be extremely difficult to predict the result of the coming election. Although the black swan events generally have negative connotation, some of them might be the harbinger of more positive development in the longer run.
Hence, instead of guessing the outcome, investors should instead focus on fundamental of the economy and adopt a systematic portfolio approach in order to prevent their overall portfolio performance from being affected significantly by a single country exposure.