Temporary profit-taking seen as elections approach

PETALING JAYA: The impending general election will inspire
profit-taking among investors as they intuitively brace for any
political uncertainty but history has shown that the impact of
elections on the market is only temporary and usually not as bad.
Alliance
Research said although the market could intuitively succumb to selling
pressure when there was political uncertainty, past experience proved
that it was not as bad as one might perceive.
“Furthermore, our
analysis of the last general election shows that market selldown due to
political shock' is temporary and will normalise in three months,” it
said in its report.
In Alliance Research's survey on investors'
expectations on the coming elections, the research house said “market
performance over the long term is dictated by fundamentals and macro
outlook.”

[You must be registered and logged in to see this image.] It
noted that investors had been risk-averse, resulting in defensive
sectors such as consumer, telecommunication and real estate investment
trust outperforming the FBM KLCI during the first eight months of the
year.
However, cyclical sectors such as construction, property
and technology have significantly underperformed the FBM KLCI over the
same period.
Alliance's recommendation for investors who need to
be more liquid or short-term oriented to stay defensive because
“despite yield compression to levels not seen before, dividend paying
stocks such as those in the telecommunication, consumer and real estate
investment trust sectors will continue to see sustained market
performance.”
“However, for value investors who have longer
investment horizon, there are opportunities to pick up beaten down
cyclical stocks. For these investors, we would like to highlight four
postgeneral election investment themes.
Alliance recommended
exposure to the construction, utilities and gaming sectors as
post-election investment themes. “Our top stock picks for the
post-election theme are Gamuda, Mudajaya,
Tenaga and MPHB.” Conversely, the research house believed a de-rating
could happen for consumer stocks after the 13th general election as
investors return to higher beta plays.
“Potential implementation
of Government Service Tax, subsidy rationalisation and fuel cost pass
through due to higher electricity tariff are de-rating catalysts for
consumer stocks. From the survey, majority of investors appeared
bearish on the market once the Parliament is dissolved with 68.1%
expecting a decrease in the FBM KLCI.
“Few were bullish that the
FBM KLCI would head north once the dissolution is announced as only
6.9% expected an increase. On the other hand, 13.9% expects the FBM
KLCI to remain flat while 11.1% remained unsure of the potential market
direction,” it reported.

[You must be registered and logged in to see this image.] History has shown that the impact of elections on the market is only temporary On
the political tussle, the survey results indicate that investors are
generally pessimistic that Barisan Nasional (BN) would recapture more
Parliamentary seats in the 13th general election with only 12.5%
expecting an increase.
However, 52.8% of the respondents expect
the results to remain status quo like in the previous elections with a
more or less than 5% variance. On the downside, 34.7% expect BN to lose
more seats.
Concluding it, the survey implied that most of the respondent expects the ruling BN to form the next Federal Government.
On
strategy, 16.7% of respondents which included fund managers and
buy-side analysts from domestic institutional funds said elections had
no influence on their investment strategy.
“We believe this
segment of respondents is likely to consist of government-linked
investment funds which tend to have a longer term investment horizon.
For the majority of other investors, the results indicate that
elections do influence their investment strategy,” Alliance reported.
Of
the respondents, 40.3% said that the impending elections had caused
them to avoid sectors influenced by the elections while 37.5% said that
they were avoiding politically linked stocks.
Alliance believes
this is largely why sectors such as construction have underperformed
the FBM KLCI although it also points out that even if the incumbent BN
does not improve its Parliamentary seats tally, there is little risk in
terms of project implementations.
“We have witnessed since the
12th general election that projects still do get implemented even with
a strong opposition party in place.”
In terms of asset
allocation, 20.8% of the respondents said the elections caused them to
reduce exposure to Malaysian equities. On the other hand, 26.4% said
that they had been riding on the election theme by looking at
“post-election plays”.
In terms of popular vote, there were a
slightly higher proportion of investors, 16.7%, who expected BN to
witness an increase. Despite this, the downside was also greater with
the majority of 47.2% expected a decrease. The remaining 36.1% of the
respondents expected no changes in the popular vote outcome.
As
for when the general election is expected to be held, 50% of the 72
respondents said it would be after Budget 2013 announcement on Sept 28
but before year-end.
Only a meagre 4.2% believe that the polls
will take place before Budget 2013 while 19.4% expect the polls to be
called next year in the first quarter.