General election the main factor for M'sian market in 2012

PETALING JAYA: External headwinds will not take centre stage as the market enters 2012, giving way to domestic affairs like the general election (GE) to take precedence.

The GE, speculated to be held within the next few months, could cause a spike in the market risk premium (MRP) again like it did in the last GE, leading to a weaker market.

“The MRP, which has been falling since September to hover near the five-year average, could start to inch up as we approach the next GE.

“This election is the most important event for the market for 2012, in our view,” Nomura Research said in its Malaysia Outlook 2012 report.

It said that in 2008, the MRP rose by 232 basis points between December 2007 and March 2008, leading to a 23% plunge in the market. The market plummeted 10% on the first day of trading after the March 8 elections then.

“In late 2007, when investors apparently thought the sky was the limit for the market, the MRP had actually been inching up,” Nomura said. “In hindsight, it appears that the smart money acted ahead of the March 2008 general election, demanding higher returns on perceived higher political risks.”

An analyst from Nomura said that “the market would be a buy now as it is cheap, if not for the potential market risk premium”.

That said, the report pointed out that “we believe that we had probably seen the worst in terms of the impact of political uncertainty on the stock market”.

“Despite having a young demographic profile and facing a growing number of younger voters, Malaysia's political development is far from being revolutionary, in our view,” it said.

This analysis came from noting that some minority party leaders from both the ruling government and opposition parties have “adopted a crab mentality, with some jeopardising the good efforts of the majority leaders”.

Taking the GE and macroeconomical challenges into consideration, Nomura has maintained an overall defensive strategy for the market.

The report said that despite hefty valuations of 2.3 times for its price-to-book ratio, which is above its 2.1 times historical average, the defensive positioning would have been reconsidered with the recent sell-off looking to price in a lot of the bad news on macro uncertainty in Europe and China.

“The only area we would look at buying would be telcos,” it said, noting that the positive stance on the sector was supported by “continued mid single digit industry growth, 6% average earnings growth outlook and stable to rising dividend potential”.

“What's holding us back from turning more positive is the political uncertainty surrounding the outcome of the next election due in a few months,” it said.

In its sector call summary, the telco sector was the only one rated “overweight”. Banks, construction, oil and gas, airlines, property and healthcare all received an “underweight” outlook while tobacco was rated “neutral”.

“In the telco space, our top picks are DiGi and Telekom Malaysia.

“We continue to like Genting Malaysia for its strong earnings visibility.

“In the banking sector, our preferred pick is Hong Leong Financial,” it said.

On global headwinds, Nomura added that if China has a hard landing, Malaysia could see its gross domestic product reduced to minus 5.8% next year.

Palm oil would suffer the most impact as China is the third largest consumer of crude palm oil and has contributed 17% growth to the industry here over the decade.

It said that a hard landing would also affect a wide range of other areas like crude palm oil (CPO), currency and futures, which could move CPO prices down sharply in the short term.

However, Nomura reckoned that palm oil should continue to have the cost per yield advantage over soy oil which the Chinese also consume a lot of.

“In tough times, we believe consumers would be more likely to switch to cheaper oils, such as palm oil, as was seen in 2009,” it said, citing the example from two years ago when vegetable oil consumption growth remained steady but soy lost its market share to palm oil.

“Looking at the industry average gross margin for upstream planters, we see that it has never dipped below 25% in the past 20 years,” it said.

On other sectors, Nomura said that the impact on banks would likely be negligible as there is limited exposure to the Chinese market.

“However, we are concerned about the indirect impact on banks. In a severe slowdown, loan growth could contract, margins would be squeezed from a lower overnight policy rate and credit costs could rise,” it said.