PETALING JAYA: TA Research has downgraded the banking sector from “overweight” to “neutral”, mainly due to the heightened risk of election-related multiple compression in a less supportive macro backdrop.
The research house cut its financial year 2026 (FY26) and FY27 price-to-book value forecasts to 1.17 times from 1.25 times, and 1.12 times from 1.2 times, respectively, ahead of the 16th general election (GE16).
It added that the downgrade was not driven by concerns over sector fundamentals, which remain sound.
“For long-term investors, we note that periods of political uncertainty could present attractive entry points, particularly if share-price weakness diverges from underlying fundamentals,” it explained.
TA Research said with the Johor and Negri Sembilan state elections approaching, speculation was mounting over the possibility of an early GE16.
“Against this backdrop, we believe it is timely to revisit the historical relationship between Malaysia’s three most recent general elections (GE13, GE14 and GE15) and the performance of the banking sector.”
The research house said it believes that banks play a pivotal role during election cycles.
It noted representing roughly one-third of the FBM KLCI’s market capitalisation, lenders were among the most widely held Malaysian equities by both domestic and foreign institutional investors.
As such, banking stocks are often seen as serving as a proxy for broader economic and political sentiment, it said.
It added that their heavy weighting in institutional portfolios made them particularly sensitive to shifts in foreign positioning, often absorbing the brunt of capital flows into and out of Malaysia.
A senior banking analyst told StarBiz: “Banking stocks are practically the backbone of the local market. If you want to gauge the health of the stock market, look at banking stocks.”
Meanwhile TA Research said election periods tend to amplify market sensitivity.
It pointed out that foreign investors, cautious of political uncertainty, often adjust their exposure to markets seen as politically vulnerable.
In Malaysia, this has consistently translated into pronounced swings in banking stocks, with foreign funds emerging as a potential decisive force behind performance, it added.
TA Research said a recurring pattern across GE13, GE14 and GE15 shows that foreign investors consistently reduced exposure after polling day, regardless of the election outcome.
“The key difference was not whether outflows occurred, but rather the speed and severity of the adjustment.”
It said while GE13 reflected disappointment over limited political change, GE14 triggered a reassessment of policy direction following the historic change in government, and GE15 saw a more gradual normalisation as strong banking fundamentals initially offset political concerns.
“In each case, however, valuation multiples compressed as investors demanded a higher risk premium.
“Looking ahead to GE16, we expect a similar dynamic.”
TA Research said the banking sector’s earnings should remain broadly resilient, but valuation risk is becoming increasingly important.
Political uncertainty typically drives investors to demand a higher equity risk premium which weighs on valuation multiples even when earnings expectations hold steady, the research house added.
