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Thursday, October 20, 2011

Election Factsheet - All That You Want to Know (OSK)

With Malaysia’s General Election likely to be held soon, we take the opportunity to revisit the market’s performance prior to and after the last eight elections, the current political situation as well as regional benchmarks’ performance after their respective countries’ elections. We found that buying just before an election and exiting one month later is the most consistent strategy for the Malaysian market, especially since we feel that there is a strong chance of the ruling coalition improving on its 2008 poll performance. Nonetheless, an election remains a short term trading driver and we remain Defensive on the longer term. Our 1466-pt KLCI fair value remains intact.

A 101 guide to Malaysia’s election-equities relationship. While our expectations for a November General Election for Malaysia look increasingly unlikely (although we haven’t written it off just yet) with the PM yet to call for the dissolution of Parliament, most investors nonetheless expect the elections to be held latest by March 2012. As such, in this report, we look at the dynamics governing the relationship between elections and market response.

A 1-month post election strategy the most consistent. A look at the KLCI’s historical performance around the past eight elections shows that the best strategy entails buying into the market just prior to an election and selling out about a month after. This strategy gives the 2nd highest probability of a positive return. The average returns over the past eight elections from employing such a strategy are also the 2nd highest among other possible strategies, such as buying six months prior to an election, or holding for three months post election.

Ruling coalition may improve its performance this time around. While the opposition alliance Pakatan Rakyat’s (PR) geographical strength is in the urban areas, west coast of Peninsular Malaysia and conservative heartland of north Malaysia, the ruling Barisan Nasional’s (BN) strength is in the southern part of Peninsular Malaysia and East Malaysia. The coalition garnered 63% of the parliamentary seats in 2008 and we feel that it is likely to improve on that performance in the coming general election.

Post election, political uncertainty will clear up. In general, if there is no unrest post election, and the elected party seeks to ensure the country’s progress in a moderate and reasonable manner, equity markets tend to perform better as political uncertainty clears. This is evident from recent regional elections where the stock exchanges of Indonesia, Thailand and Singapore all did reasonably well post election.

Election Trading Strategy: Keep it short and tight. By this we mean that investors should remember that elections are in general a short term localized driver. As such, we recommend:
1. Wait for profit taking ahead of the general election before entering the market;
2. Buy just before the election date and ride on the positive post election sentiment;
3. Exit about one month after the elections;
4. Focus on Blue Chips in the Banking, O&G and Construction sectors rather than on so-called ‘election plays’.
Outside of this localized trading strategy, we remain Defensive on the longer term and maintain our 1466-pt KLCI fair value for 2012.

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