General Election’s effect on local Stock Market

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Mar 10 2008
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Malaysia’s 12th General Election has ended but not without shocking and heart-breaking results. In other countries such as Italy, U.S. or Germany such result would have been considered normal but in Malaysia, such results are abnormal. It can be equate to people revolution against a 50-year-old government that squeezed the people with excessive corruption, so much so that nobody can deny people from all the ethnics (Malay, Chinese and Indian) swung their votes to the oppositions. The ruling government, National Front (popularly known as BN for Barisan Nasional), was caught off-guard. Suddenly the warlords from BN who used to think they were immortal, invincible yet arrogant were trembling with cold sweat.

Take for example the terrible and shameful defeat of former Works Minister, Samy Vellu, who was treated like God to many local Indian. He was invincible for almost 30 years as MIC president representing Indian community in the then strong BN government. Who would have thought he has to cancel his 72nd birthday celebration after his unexpected defeat? No gamblers who were betting in this round of election would bet against this heavyweight. But if you believe in “Karma” then you shouldn’t surprise that the time has come for the punishment to be bestowed upon this person.

He should have taken the honorable exit route together with former premier Mahathir in 2003. At least Samy would have “Tun”ship the same way Ling Liong Sik has gotten it. But I guess he couldn’t resist the temptation of “greed”. So serve him well. After his defeat all of my Indian friends that I talked to were rejoicing (about his defeat). It might sound cruel but it appears most of the Indian are celebrating as if it’s some sort of “Deepavali” festival. After his defeat, the rumors are circulating that Samy Vellu has flew out of the country.

Election result’s impact on the stock market

Anyway, let’s go back to the topic of stock market. What would be the effect of the latest general election result on the local stocks? One word to describe it – huge sell-off, as can be seen by the Composite Index which registered a loss of a whopping 130 points or more than 10 percent plunge. But it is expected considering that geopolitical landscape has changed and the ruling BN government no longer enjoys the two-third majority. In the name of political instability, foreign investors are selling like mad follows by local investment arms.

Two types of stocks are being hit the most, political-linked stocks and government-linked stocks. There’s difference between both mind you. Political-linked stocks are listed companies that are directly linked to BN itself such as Equine Capital, MRCB, UEM World Berhad, Scomi Group / Engineering, Bumiputra-Commerce Holdings Berhad and so on. Government-linked stocks are companies that are indirectly related to BN government such as Tenaga Nasional Berhad, Telekom Malaysia, Gamuda Berhad, Sime Darby and so on.

But really, you can’t find stocks that are not related to the government since there’s a requirement to give away 30 percent stakes in almost any listed companies to the ethnic Malay (in most cases ended up within the grip of small groups of UMNO politicians). That’s the reason why you’re witnessing a sell-off across the board today. Company such as Scomi which is related to Abdullah Badawi’s son Kamaluddin and ECM Libra which is related to his son-in-law Khairi Jamaludin should be avoided at this time. Equine Capital Berhad (KLSE: EQUINE, stock-code 1147) which became the talk of town due to its close relationship with Badawi, so much so that its’ boss was known as “Patrick Badawi” is another stock that you should avoid. MRCB and Equine Capital are two of the stocks that would be affected the most since their multi-billion projects in Penang would most probably hit the wall with the DAP taking over the state.

Would the stock market perish?

Get real, just because the oppositions captured 5 states does not mean it’s the end of the local stock market. In fact over the long run it’s good to minority shareholders as it produce transparency and good corporate governance. You wouldn’t want to see another Transmile scandal in future, do you? With most of the big corrupted fishes swam away in every scandal, the time couldn’t be better to prevent such cases from happens again. Of course Tenaga Nasional that gave lame excuse of high operating cost to increase electricity rate without spending any effort to clean its own house will be affected.

The biggest headache (to BN) is the fact that oppositions had captured the most developed states within Malaysia namely Penang (semiconductor and manufacturing hub) and Selangor (home to service-related companies). But rest assure that oppositions would not screw-up and make major changes to the existing investment. In fact oppositions are under tremendous pressure to not only maintain but to show to people that it could administer and perform better than previous government (BN) in preparation for their next assault to take over the government come next general election. Already there’re reports oppositions are stationing their people to prevent previous administration from taking away “files” pertaining to investment and possible hanky-panky transactions.

Reasons why foreign investors are selling

But foreign investors do not like such major changes as uncertainties are something which could affect their return on investment. In addition they knew how notorious the ruling government in holding back state allocation to give hard times to states controlled by oppositions. Any good corporate governance and transparency to be adopted by oppositions in their newly captured states would take time.

Also foreign investors are concern on the possibility that oppositions might object any new corporate policies to be introduced by ruling government BN for the sake of objection since the BN has lost its cherished two-third majority, the same way BN objected oppositions’ previous policies. It’s more of a tit-for-tat revenge that foreign investors are afraid of, never mind how noble and determined oppositions’ wish to prove otherwise.

But that’s not all. The m
ost severe consequences is the fact that Abdullah Badawi’s own fate is very fragile, never mind he stubbornly wish to cling to power despite calls for him to steps down to take full responsibility of the disastrous BN’s performance. Badawi is expected to face tough challenge when he faces his own party’s, UMNO, election this August 2008. In an interview with Malaysiakini, former premier Mahathir fired his latest salvo to Badawi asking him to take full responsibility.

Opportunity to accumulate stocks?

Instead of crying how the stocks are plunging, why not take this tumble as the fire-sales and opportunity to buy good and quality stocks at a bargain? I don’t think I’ll just let Sime Darby pass by if it were to drop to RM5.00 a share *grin*. How about IOI Corporation, Resorts and Genting Berhad? Yeah, let Maybank drop to RM3.00, Berjaya Toto to RM2.00, Public Bank to RM5.00 and DIGI.com to RM5.00 a share.

So, let’s cheers and pray that the stocks would drop further.

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What are the characteristics of the companies which investors should avoid and buy,after election?Just avoid companies with a lot of Malays in it (See Board of Directors) and buy heavily in stocks managed by foreigners and Malaysians.Come to my blog to view the post ‘Organizational Culture’.

BN is over confident with their own ability. At the same time benefits is only shared within themselves instead of offering the benefits to the public. I believe the public should deserve something better. We need a government that actually takes care of the public welfare and being.

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