In search of election gems
Cheah Chor Sooi 
With foreign inflow the strongest in several years, risk appetite has risen while the KLCI seems technically viable if the high daily value can sustain

SELECTED government-linked and well-connected stocks – particularly those backed by fundamentals – are poised to make a last-gasp rally as the 14th General Election (GE14) looms.

Even as the benchmark FBM KLCI and other major indices, particularly the FBM Top 100 Cap Index, FBM Mid 70 Index and the FBM Emas are in consolidation mode, the top 10 government-linked companies (GLCs) in terms of market capaitalisation are either holding steady near their one-year highs or seemingly able to sustain their uptrend.

Despite this, some says GE14 should be the sole criteria in buying GLC stocks as focus must also be on profits, value and growth story.

The KLCI closed 0.38% or 7.03 points lower to 1,821.6, which is off its high of 1,832.15 on Jan 8.

CIMB Group Holdings Bhd, Malayan Banking Bhd (Maybank) and Tenaga Nasional Bhd are top performers with gains of 49.8%, 23.1% and 13% respectively over a one-year period between Jan 3, 2017 and Jan 18 (see chart).

Four companies under the Petronas stable have mixed fortune during the same period with Petronas Chemicals Group Bhd gaining 16.9% followed by Petronas Dagangan Bhd (3.6%) and MISC Bhd (2.5%) but Petronas Gas Bhd is down 19%.

Elsewhere, Axiata Group Bhd chalked up a 22.8% gain over the one-year period while Sime Darby Plantation Bhd which was quoted on Nov 30 has gained 10.58% but IHH Healthcare Bhd is 6% lower.

Government-linked investment companies (GLICs) control an estimated RM1 tril in investments with 35 GLCs in Bursa Malaysia’s Top 100 companies (42% of market capitalisation), according to Edmund Terence Gomez, a professor of Political Economy at Universiti Malaya’s Faculty of Economics & Administration, in his recent book, Minister of Finance Incorporated: Ownership and Control of Corporate Malaysia.

Aside from GLCs, stocks perceived to be well-connected also tend to be darlings to punters whenever a general election is around the corner. A few languishing stocks have rebounded from their lows in recent times, ie Utusan Melayu (M) Bhd, Cahya Mata Sarawak Bhd, Felda Global Ventures Holdings Bhd, KUB Malaysia Bhd and Malaysian Resources Corp Bhd.

Elsewhere, three companies which are part of tycoon Tan Sri Syed Mokhtar Bukhary’s business empire, namely MMC Corp Bhd, DRB-Hicom Bhd and Pos Malaysia Bhd have also shown improved performance in recent times.

Market cap more than RM10 bil

Buy based on fundamentals

What is compelling to BIMB Securities Research head Azharuddin Nordin is that the election theme alone should not be the sole criteria to randomly pick up any GLC stock – even for the short term.

After all, with the foreign inflow into Malaysia now strongest in several years, risk appetite has risen while the KLCI, which is now highest in more than two years, seems technically viable if the high daily value can sustain.

Aside from the improving macroeconomic conditions back home, the ringgit has strengthened significantly against the greenback to a high of 3.95 per US dollar while Brent crude has breached the US$70 (RM276.50) barrel level, which is a three-year high.

“Focus on earnings and value ... not on speculations or rumours,” he tells FocusM. “After all, GLCs are now been well-managed with telcos [Telekom Malaysia Bhd and Axiata] showing stable profit margin and likewise, Petronas-owned companies have shown commendable growth. They should do well this year.”

JF Apex Securities Research head Lee Chung Cheng prefers fundamentally-sound GLC stocks regardless if they are large or small-cap, given the thematic play is more suited for short-term trading. To him, there is no specific sector that investors favour so long as “the stocks fit their theme”.

“It would be advisable for retail investors to dabble in quality stocks in the event they fail to exit and need to hold their stocks for a longer period,” he says.

As to sustainability of the stocks post-election, Lee opines that this may depend on the polling results.


Defensive strategy

In its 2018 Market Outlook, JF Apex Securities Research found that pre- and post-election movement in the stock market is inconclusive in contrast to the general perception that the market would trend upwards ahead of the election.

“We expect some profit taking to happen when approaching the polling date whilst stock movement post-GE14 is highly dependent on the outcome,” noted the research house.

More broadly, JF Apex expects the market to be choppy this year, stemming from a slew of uncertainties in local and external fronts which include:

• Outcome of GE14;

• Gross domestic product growth for this year is likely to slow down following surprisingly strong economic growth recorded last year;

• Downside risks on corporate earnings growth – concerns on escalating costs with the implementation of fewer policies and rulings starting this year;

• Prelude of normalisation of interest rate from developed markets to emerging markets;

• Possibility of financial crisis happening in China;

• Jittery over the curse of 10-year downcycle especially the Wall Street hitting all-time highs; and

• Flattening of yield curve signalling economic recession ahead.

On this note, the research house urged investors to adopt a combination of defensive and active investment strategies by investing in (i) value stocks which are trading at a lower price relative to their book value; (ii) growth stocks which yield brighter earnings prospects, and (iii) high-yielding stocks with resilient business models, ie stable earnings coupled with positive operating cash flow which are unfazed by the sudden slowdown in economic growth. 

This article first appeared in Focus Malaysia Issue 268.