How will the share market react to a Pakatan victory?

(This post was originally published at The Malaysian Insider)

During the last few weeks there have been increasing predictions from Barisan leaders emphasising that there will be a sharp fall in the share market should there be a Pakatan Rakyat (PR) victory.

The latest prediction by MCA leader Dr Chua Soi Lek in a party event at Kepong argues that Malaysia will witness a “‘huge financial disaster if Pakatan Rakyat comes to power in the 13th general election”.

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This type of electioneering tactic aimed at frightening the electorate is dangerous and irresponsible. How can the MCA president be so confident as to openly declare that our stock market will drop to 500 points within a week if the opposition wins power?

Challenge to Dr Chua Soi Lek

Let us subject his prediction to closer analysis. Firstly, it is not clear whether he stated that the KLCI will drop by 500 points or drop to 500 points. Whichever is the correct version, his claim implies that anything from one to two thirds of the total share value of the KLCI will be wiped out due to the election result.

Now if this were to happen, the drop will be unprecedented in the history of share markets anywhere in the world. So far as I am aware, no modern national stock exchange has had such a sharp fall as a result of a national election outcome and I am sure it will not happen in Malaysia.

I am willing to place a big bet with Dr Chua that his fears of a 500 point drop are unfounded and baseless. The loser of the bet will have to donate an agreed sum of money to the other person’s preferred charity. I hope he will agree to this and prove to be a man of his word.

Will the market rise on a BN victory?

Not only should we discount the possibility of a sharp fall, but we should also – on the basis of stock market behaviour elsewhere in the world – not assume that the Malaysian share market will automatically rise as the result of a BN victory.

For example, on November 7, immediately after Barack Obama, the incumbent Democrat president, was returned to power, the Dow Jones industrial average plummeted as much as 369 points, or 2.8 per cent, in the first two hours of trading. It recovered in the afternoon, but ended down 313, its biggest point drop for more than a year.

Various analysts that I have talked with have made the point that Dr Chua is not a stock market expert. They argue that in trying to exaggerate the prospect of a market meltdown, Dr Chua is contradicting the BN’s argument that the economy is fundamentally sound and resilient.

At the same time, these analysts anticipate that there could be a market fall in the KLCI even if the BN is returned to power. They base this prediction on several factors:

• The BN through its control of EPF and other major government and government-linked investors has been supporting the market and propping up Umno-linked counters such as Felda Global Ventures Holdings Bhd (FGVH) which is struggling to hold on to its initial public offer price of RM4.55. Without this pre-election support aimed at placating the Felda settlers and gaining their vote, FGVH will definitely be trading below the IPO price.

• The European and American economies are still going through a phase of recovery. Although there has been an inflow of foreign funds into the Malaysian market, there could just as quickly be a reversal of financial flows.

Prediction of market rise with PR victory

What is likely to happen should there be a PR victory? My prediction is that there will be a rise in the share market should there be no attempt at violence or a coup d’état by the losers. This is because of the following factors:

• The Malaysian economy has been under-performing all these years while under BN rule. The attached table shows the growth of GDP per capita of South Korea, Taiwan, Singapore and Malaysia from 1980 to 2011. From the table we can see the gap has arisen between these countries and Malaysia in this measurement of the wealth of nations. Should we continue under BN rule, our economy is likely to continue to under-perform and our stock market will continue to stagnate not only in the short term after the elections but for the long term.

• Foreign investors who have long been underweight in the Malaysian market due to Dr Mahathir Mohamad’s disastrous economic model built around mega projects, crony capitalists as key players, and other distortionary policies will be attracted back into the market. As recently as in 2011, Bank of America Merrill Lynch noted that Malaysia remained a “big underweight” for investors in emerging markets. An underweight call is a recommendation for investors to reduce their investments in a particular security, asset class or, in this case, country. Malaysia also slipped from 14th place to dead last among the 15 countries studied by the investment bank, despite the roll out of big ticket Economic Transformation Programme projects.

There are other indicators that the market will not take fright but will rally on account of a Pakatan victory. As pointed out by an SME investor, they include:

• The fact that the opposition states of Penang, Selangor, Kedah and Kelantan have attracted more investment that the ten BN states by accounting for RM25 billion in investments comprising 53 per cent of Malaysia’s total investments of RM47.2 billion in 2010.

• If a major sell-down occurs in the Bursa as a result of a Pakatan victory, the nation’s economic institutions such as EPF, PNB, Khazanah and other GLCs would support the market.

• PAS has administered Kelantan for more than 20 years, and Kedah for five years. These two PAS state administrations have neither acquired nor appropriated property, assets or businesses belonging to non-Muslims.

Proposals for a sustainable market rise

Although I am optimistic that the market will rise on account of a PR victory, it is necessary for the new government to act decisively when it comes to power. I would like to propose the following measures to ensure that the post-elections market rise is sustainable:

• To form a business council with captains of the leading industries to find ways for economic improvement and expansion.

• MACC directly under Parliament to look at illicit money outflows and recovery of the monies.

• Investigate the way Petronas sells our national oil and to verify the rumour that it has a long term contract with a company which buys it at much lower than current prices.

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