A month of uncertainty

FINALLY, the 14th General Election (GE14) is in sight. That is the best thing that has come out this week, as global stock markets roiled on the back of a trade war between two economic giants – the US and China.

Prime Minister Datuk Seri Najib Tun Razak will dissolve Parliament today and the GE will be held within 60 days.

Going by history, polling will take place within a month.

During this period, uncertainty will besiege the stock market. It cuts across government policies and projects. The biggest uncertainty from a GE is political leadership that will shape how government policies are to be implemented in the next five years.

Investors will look for clues and signs that point to the possible outcome during the campaigning period. It matters because the outcome of the polls determines everything that moves the capital markets – from broad government policies to where the money will be channelled in the next five years.

Companies that are politically linked tend to come under intense scrutiny during this period. It is normal for companies that get government jobs to be less appealing to investors during this period.

In the last GE, after Najib announced the dissolution of Parliament, in a knee-jerk reaction, the index fell 50 points during intra-day trading. However, before the trading ended for the day, the market recovered its losses.

In the run-up to the actual polling day on May 5, 2013, the market picked up as the reading indicated a win for the incumbents.

After Barisan Nasional won with a larger majority, it was back to business as usual on Bursa Malaysia.

This time, after the announcement of Parliament being dissolved, there was muted response from the stock market.

This is because Bursa Malaysia has already been trending down since February. The benchmark index, which is the FBM KLCI, ended the day unchanged. Year-to-date, the FBM KLCI is still up by about 3%.

However, the small-cap index has shed more than 20% so far this year. It is an indication that it is gone into bear market territory – the first time in three years.

It just goes to show that while the headline numbers are holding steady and Malaysia’s international reserves have increased to US$107bil, the broad stock market is weak.

Najib is facing a tough fight in this GE, where the Opposition will contest under the Pakatan Harapan team.

The move by DAP, which easily is the dominant Chinese-based political party, to contest under the PKR logo in peninsular Malaysia is interesting.

If this happens, it will be the first time in 49 years that the DAP logo will not feature in peninsular Malaysia.

The latest development spells a bigger challenge for the non-Malay-based component parties in Barisan, who depend on the Malay votes for some support. Some do not discount the possibility of MCA and MIC ending up with less or no elected representatives in the polls.

If this happens, it is another major change in the local political landscape, much bigger than the 2008 shock when Barisan lost its two-third majority in Parliament for the first time.

Not many investors have gone through a period of political changes. Those who have witnessed it would probably have liquidated their positions in the market.

After the 2008 GE, there were uncertainties on the position of Tun Abdullah Ahmad Badawi.

Abdullah eventually stepped down to pave the way for Najib in April 2009. The transition was announced more than six months ahead and it calmed down the investing environment.

So far, it is still early to assess the outcome of GE14. The general view is that Barisan would remain in power. However, nobody would dare predict in what shape and form Barisan would emerge from the GE.

Adding to the uncertainty for investors is the growing global trade war between China and the US. It does not help improve sentiment at all, despite what some may say.

Both countries have come out with lists of goods that would be slapped with tariffs.

The US will allow 30 days for the industries to return with feedback before deciding on the final list by May 22.

As for China, it has filed a notice with the World Trade Organisation, apart from coming up with a list of US goods that would be slapped with tariffs.

The bright spark in the US-China trade spat is that both countries are prepared to sit at the negotiating table.

However, the downside to the impending negotiations is that not many believe an outcome that is favourable for global trade can be achieved. In fact, there are questions if the negotiations will even take place, as both countries are adding on to the list of goods to be charged with tariffs in a “tit-for-tat” trade war.

In the latest development, president Donald Trump has hit back at China’s move to impose tariffs on 1,300 goods imported from the US, including soybean.

The US Trade Department has been told to look into the possibility of imposing tariffs on US$100bil worth of goods that are imported from China.

The US president believes that China deserves to be slapped with tariffs and justifies the action by stating that the country had not done enough to address the trade imbalance and continues to force US companies to turn over technology, or enter in joint ventures with partners from China.

China, on the other hand, feels that it has been doing what is required of a free market. It also feels that the US is not sincere in wanting to negotiate a settlement to rectify the trade balance and other issues between both countries with its public announcements and actions.

The US move to expand the imposition of tariffs on goods from China and public statements from Trump have given rise to the view that it makes it difficult for President Xi Jinping to engage in any negotiations on the matter.

The trade war is a long-haul affair, and GE14 could spring a surprise or two.

In the current environment, it’s best to hold on to cash. Investors could be in for a roller-coaster ride in the next one month. Value stocks will emerge, even among the blue chips.

In value investing, apart from determining the intrinsic value, getting a feel on the margin of safety is crucial. After the next one month, the margin of safety will be much better for those looking for long-term investments.

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