Petaling Jaya (The Star/ANN) - The impending general election of Malaysia will inspire profit-taking among investors as they intuitively brace for any political uncertainty but history has shown that the impact of elections on the market is only temporary and usually not as bad.
Alliance Research said although the market could intuitively succumb to selling pressure when there was political uncertainty, past experience proved that it was not as bad as one might perceive.
"Furthermore, our analysis of the last general election shows that market selldown due to political shock is temporary and will normalise in three months," it said in its report.
In Alliance Research's survey on investors' expectations on the coming elections, the research house said "market performance over the long term is dictated by fundamentals and macro outlook".
It noted that investors had been risk-averse, resulting in defensive sectors such as consumer, telecommunication and real estate investment trust outperforming the FBM KLCI during the first eight months of the year.
However, cyclical sectors such as construction, property and technology have significantly underperformed the FBM KLCI over the same period.
Alliance's recommendation for investors who need to be more liquid or short-term oriented to stay defensive because "despite yield compression to levels not seen before, dividend paying stocks such as those in the telecommunication, consumer and real estate investment trust sectors will continue to see sustained market performance".
"However, for value investors who have longer investment horizon, there are opportunities to pick up beaten down cyclical stocks. For these investors, we would like to highlight four postgeneral election investment themes."
Alliance recommended exposure to the construction, utilities and gaming sectors as post-election investment themes. "Our top stock picks for the post-election theme are Gamuda, Mudajaya, Tenaga and MPHB."
Conversely, the research house believed a de-rating could happen for consumer stocks after the 13th general election as investors return to higher beta plays.
"Potential implementation of Government Service Tax, subsidy rationalisation and fuel cost pass through due to higher electricity tariff are de-rating catalysts for consumer stocks. From the survey, majority of investors appeared bearish on the market once the parliament is dissolved with 68.1 per cent expecting a decrease in the FBM KLCI.
"Few were bullish that the FBM KLCI would head north once the dissolution is announced as only 6.9 per cent expected an increase. On the other hand, 13.9 per cent expects the FBM KLCI to remain flat while 11.1 per cent remained unsure of the potential market direction," it reported.
On the political tussle, the survey results indicate that investors are generally pessimistic that Barisan Nasional (BN) would recapture more Parliamentary seats in the 13th general election with only 12.5 per cent expecting an increase.
However, 52.8 per cent of the respondents expect the results to remain status quo like in the previous elections with a more or less than 5 per cent variance. On the downside, 34.7 per cent expect Barisan Nasional (BN) to lose more seats.
Concluding it, the survey implied that most of the respondent expects the ruling BN to form the next federal government.
On strategy, 16.7 per cent of respondents which included fund managers and buy-side analysts from domestic institutional funds said elections had no influence on their investment strategy.
"We believe this segment of respondents is likely to consist of government-linked investment funds which tend to have a longer term investment horizon. For the majority of other investors, the results indicate that elections do influence their investment strategy," Alliance reported.
Of the respondents, 40.3 per cent said that the impending elections had caused them to avoid sectors influenced by the elections while 37.5 per cent said that they were avoiding politically linked stocks.
Alliance believes this is largely why sectors such as construction have underperformed the FBM KLCI although it also points out that even if the incumbent BN does not improve its parliamentary seats tally, there is little risk in terms of project implementations.
"We have witnessed since the 12th general election that projects still do get implemented even with a strong opposition party in place."
In terms of asset allocation, 20.8 per cent of the respondents said the elections caused them to reduce exposure to Malaysian equities. On the other hand, 26.4 per cent said that they had been riding on the election theme by looking at "post-election plays".
In terms of popular vote, there were a slightly higher proportion of investors, 16.7 per cent, who expected BN to witness an increase. Despite this, the downside was also greater with the majority of 47.2 per cent expected a decrease. The remaining 36.1 per cent of the respondents expected no changes in the popular vote outcome.
As for when the general election is expected to be held, 50 per cent of the 72 respondents said it would be after Budget 2013 announcement on September 28 but before year-end.
Only a meagre 4.2 per cent believe that the polls will take place before Budget 2013 while 19.4 per cent expect the polls to be called next year in the first quarter.