CIMB’s Strategy June 2018

June is definitely a bear market but July just started which also marks the start of the 2nd half for 2018. Being down sharply for the last 2 months, we see possibilities for July to close higher than the 1st half.

CIMB posted its Malaysian strategy and it is clear that the weakest component on the KLCI I still the construction sector. Meanwhile, miners get a lift through higher oil prices.

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Furthermore, the report includes a very important chart where we see the correlation of foreign buying versus the value of Ringgit against the US Dollars.

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In short, weakening RM gets foreign funds selling. We missed the divergence for foreign money to come back after the election, but we believe that it takes time for confidence to rise and money to flow back in. The cabinet is in full force and business continues as usual.

CIMB only placed overweights on the oil and gas industry this time around.

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Take a look at their strategy report. A lot of information and data provided for your reference.

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UOBKH Top Picks for Malaysia Jul 2018

Their recent top picks include VS and INARI which is part of our focus list. They removed a couple of construction companies from their alpha picks this month and replaced with weakening ringgit beneficiary.

Have a look at the argument why VS and INARI are included in the report below!

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What We Would Love from The New Govt – Full EC Reform

The Election Commission of Malaysia had been criticised over and over again for creating questionable actions that worry the Rakyat during the voting process. We believe that returning the confidence on EC is key under the new government.

The only way to clean the EC’s name is to proposed a full reform on how things should be done in GE15. With a long 5 years of time available, we believe that the commission have more than enough time to sort things out for the future of cleaner elections.

What We Would Like to Reform

(1) Educating The Public on Polling Procedures

We believe that this should be repeated every single election to new voters or as an update to what has changed over the years by EC. Every single time Malaysia goes to the polls, EC should list out the do’s and dont’s rather than relying on stupid Facebook posts shared over and over on our news feed or Whatsapp messages.

A gigantic ad campaign that creates awareness should be done by EC making sure every single voter is aware or prepare them to expect certain things.

Talking to polling station staffs, we learnt that there are criteria on how stained ballot papers could still be accepted. This wasn’t communicated by the EC to all of us.

Take for example, a marked ballot paper with an X in Pakatan’s box sees indelible ink stained on the Pakatan’s candidate boxes would still be accepted.

The ballot paper considered ‘undi rosak’ only happens when there is an X Pakatan’s box but the finger stain is in BN’s side of the paper. See illustration below. Note that only stains are allowed but not scribbles or writings on the ballot papers.

1.jpgFurthermore, Cycbertrolls caused a stir at the last minute the night before GE14, Facebook sharing & Whatsapp messages flew across the region and caused confusion all over with issues regarding attire that might jeopardise one’s voting chance.

EC should educate the public beforehand on their official Facebook page, TVs and newspaper ads before the election to lower negate internet trolls that love to cause a stir in the cyber world.

Worst still, cases where ballot boxes are sent into respective schools for safekeeping causes the public to swarm the cars that send those boxes thinking those are fake votes. You might be right and you might be wrong! Who knows? But the EC should explain how these ballot boxes would be dealt with and make the public aware of this issue.

There’s no point creating fights with the Federal Reserve Unit over confusion caused by EC. We are all Rakyat bersama confused by poor management on top!

(2) Make Voting Powers Even

In GE13, BN won 140 vs 82 seats while Pakatan Rakyat won 5.6 million vs 5.2 million votes that goes to BN. We didn’t manage to change the government in GE13 although Pakatan won more votes. The value of every single vote is different and it really creates unfairness from within.

We would use the data from GE13 since it had been compiled. We believe that only a full revamp would allow voting to be as fair as it is.

First, Parliament seats totaling 222 can be increased to 223 but would still be in place as these would represent the voice of the Rakyat.

Borrowed from America’s style of voting for the President, each state carries different voting power for the new leader due to its population.

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Meaning although Kedah has only 15 Parliament seats but the voting power would be increased to 18 in equivalent seat power to determine a new government.

The State’s preference to Barisan or Pakatan would be skewed towards how many seats they’ve won. Meaning if Pakatan wins 4 seats out of 6 in Malacca in this round’s election, it would contribute 8 equivalent seat power to the government’s vote.

That being the case,  states such as Kelantan or Terengganu won by PAS with 26 equivalent seat power be a problem that causes a hung Parliament.

Obviously the idea of seats power just a part of the plan to mediate the value of every vote. This is why we still think that GE13 is an ideal environment for this to work out where it is only Barisan versus Pakatan Rakyat and there’s unlikely case of a hung Parliament happening.

We could draw up something like this in just minutes, we really hope that EC could draw up a better one in the next 5 years.

This structure could also curb on problems regarding non-voters that felt their single vote would not count. The adjusted number might increase the voter turnout that might felt that they can actually make a difference just but turning up to vote.

(3) Automatic Voter Registration

Every adult in the country has the right for one vote State and one vote Parliament. Why not automatically register every single adult that is eligible to vote? Pejabat Pendaftaran Negara has all our details.

Again, automatic registration could increase the number of turnout knowing that they have been registered automatically and it is their duty to vote for the government. One might laze around thinking that since they have not registered and their vote might not make a difference, they might as well don’t vote at all

For some, procrastination continues over the course of their lives and ended up not voting for the last 30 years which is equivalent to 6 elections! What a waste.

If we pre-register a voter, all the voter has to do is to queue up during the upcoming general election. I can almost estimate that the voter turnout percentage would automatically increase with auto registration.

If a voted has been registered and still don’t turn up then it would already fall to the right of choosing not to vote.

(4) The Election Commission Should Have Power Above The Prime Minister

EC should be the power above the Prime Minister. The check and balance system isn’t in place to curb on the overpowering effect on the board that picks you for the government in the future.

‘Never bite the hand that feeds you’. EC could never see their power higher than the Prime Minister’s office if this continues. This is really another department that the current government should revamp in the near future.

In the past few years, Malaysia had given reasons to foreign media to portray that our elections aren’t fair as EC is under the Prime Minister’s office. We should repair that clearing our name from disgraceful issues like these with the new government in place.

EC should be as independent as it can be and detach itself from being part of the Prime Minister’s department, it is only fair that the finance ministry allocate an annual budget to finance the operations of EC.

Election, Market Effects & Your Voting Outcome

We often avoid posting articles with high sensitivity towards politics but being an investor with Malaysian asset exposure, one couldn’t run from the biggest risk coming from election outcomes even with the slightest chance of a government change.

But for our followers who seek info on our page, it is only fair to give them some head up prior to GE14.

I guess we should add in a disclaimer saying “This is not a paid write up but a public service announcement by the analysis team of OM Capital” Thank You.

Outcomes

Obviously, only two outcomes from this election where the new government would be Barisan Nasional (BN) or Pakatan Harapan (PH). We could almost assume that PH would win by the number of votes based on GE13 results where 50.87% of total votes goes to Pakatan Rakyat.

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With Najib’s approval rating dropping over the years heading to GE14, it is likely that more votes would fall towards the opposition.

The introduction of GST, the scandals involving 1MDB, the participation of Dr. M in GE14, ringgit’s wild ride against many other currencies and the list goes on. The everyday rakyat might have had enough of this and this might spark a change with a shift of votes going to PH this round.

Sadly in Malaysia, one vote is not worth one vote in the parliament because there are seats with 30K voters versus seats with 150K voters. The power of 30K voters outweighs 150K voters, how cool is that? You can see the link below for explanation on this.

See Why isn’t every Malaysian vote Equal?

With that being said, the road to parliament is so much steeper for PH rather than the incumbent. Anyway let’s go back to the markets.

Currency

We start with currency since it’s the easiest. The MYR is stronger that ever and we recommend that you should start your exchange to foreign currency before GE14 (which we did last week) if you had plans for overseas travels or kid’s tuition fees.

Basically, the MYR will weaken based on historical facts after the election.

Let it be BN win or PH, we estimate that there would be a decline eventually.

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The drop in MYR would be gradual if BN stays. This had been the case in past elections and we do not think that this would change this time around. MYR is at its strongest since the scandals of 1MDB and we felt that months of no movement isn’t natural for the currency.

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We see a significant one day drop if PH wins. Due to market uncertainty and investor’s confidence towards the Malaysian Government Securities, we should see some capital fled if PH wins. Investors would make their way back when the economy stabilizes but that isn’t going to be fast.

With that, case close, MYR in our estimate would drop no matter what.

Markets

Tricky as it goes and similar to the votes, market knows which stock is bias to BN. Standard government linked companies such as Tenaga, Malaysian Airports, TM would see a slight boost due to stability.

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We estimate that if BN wins, KLCI will open on the high side possible breaking the all time high but sees gradually decrease over the next few weeks due to profit taking. This happened in GE13 and likely that would repeat itself this time around.

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But if PH wins, we estimate that there could be a 20% correction to come in place as markets hate uncertainty. A change of government would spark uncertainty for Malaysia’s economy causing markets to respond negatively in this matter.

PH Wins Spells Doom?

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No, not quite. Although it seems that if you voted for a government change, we are all doomed as we should see KLCI goes nuts touching 1,500 in no time.

As said earlier, the market hates uncertainty. The market isn’t pre-adjusting that a PH win will crash the Malaysian economy. The market is merely adjusting itself to be cautious prior to the implementation and results coming from the new administration. Order still remains with markets going volatile playing the guessing game.

Based on what happened 10 years ago when the opposition took office in Penang, plenty of issues needed to be addressed straight away to get them up to speed in ruling the state. Some even said that the opposition inherited a blank office without any paper trace on documents possibly destroyed due to obvious reasons.

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That being the case, we shouldn’t be shocked seeing an empty Putrajaya if PH would to win this time around.

It would definitely take some time for a rebuilding to happen if PH takes over but this shouldn’t be the only reason for you to take into account in your voting decision. Much like investing, voting decision had to be weighted towards providing long term benefits.

One shouldn’t let short term gains acting as if they were pain killers to a bigger problem. One should address a major issue such as initiating a major operation to remove a tumor to solve the problem once and for all. We believe that many voters do place their votes in factoring long term benefits rather than emotions since awareness had been rising significantly these past few years.

Evidently, the proof that handouts such as BR1M isn’t working anymore where many had realized that in the end, we are living in a circular economy. What goes around comes around. What had been given today will be paid through means such as an increase in GST rate in the future to cover the deficit.

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Voting for BN?

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If you believe in the coalition then everything would carry on the way it is. The economy will remain stable and the economy would continue booming the way it is like what it was previously. We also believe that the amount of scandals would be reduced.

Najib would still be in power as we believe that a replacement still isn’t clear for the top spot of the administration. The next 5 years will see an economic boom strong towards the sectors which in previous years favorable to Malaysia such as electronics. Sectors such as oil & gas will continue to see a decline in interest by the BN government not only ‘politically’ but also a real deteriorating segment in our economy.

We believe that votes that goes to BN are mostly seeking stability and ignoring scandals and likelihood of cronyism within the government. It’s as if our country couldn’t run from these elements and we should still expect one to close an eye regarding this issue. Not every single being is built equal and we should still respect that.

Verdict

We still think that BN will win this time around even with many problems and scandals exposed on the media. The seats advantage rather than votes advantage played a huge role in winning the parliament.

The General Election in Malaysia had always been this way and that favors the incumbent which is why that structure had remained the way it is.

Still, vote for the party which you think is suitable and believe in.

Do not give pity votes to party that you think they might lose as this practice is worst than not voting.

Even if PH wins 60% of votes but still doesn’t pocket the parliament, don’t be discouraged by this issue. If it were that easy, the victory would have came in 2013.

Learning that Donald Trump’s win happened, Brexit amazes us until today, we shouldn’t rule out that something crazy could jump out this time in Malaysia.

 

 

 

 

 

 

 

New Guidelines for Malaysian REITs

Multiple new entries under the new guideline such as making REITs more REIT like by demanding 75% of the portfolio to be invested. It was only 50% based on the old guideline.

Strangely the new guideline allows them to do property development which make make REITs more developer like.

Take a look at the Maybank’s Report on new REIT guideline.

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New Market Participation Stimulus Under PM’s Initiatives

1. Increasing Participation

  • Small Caps and Mid Caps trades are waived from stamp duty from March 2018 for 3 years
  • Availability for retail investors to increase margin financing
  • Allowing short-selling  by retail investors
  • New investors receive a 5 months trading and clearing fee waive

What We Think?
Small Caps and Mid Caps valuation might increase further and penny stocks might be pushed ahead once again anticipating this change. Although stamp duty isn’t a huge payment in Malaysia (Max RM200) compared to Hong Kong which are calculated based on a percentage with no limit upwards, we think that the effect on increasing market participation can be short lived rather than long term.

2. Malaysia Singapore Connect

  • This effort would lead to increasing market participation as well
  • The market base would be bigger for investor

What We Think?
We felt that this would benefit Malaysian market more than Singapore market. Investors in Singapore with higher purchasing power due to currency might be more interested to buy Malaysian stock as more quantity can be secured in terms of trading. Investors would be indifferent since the leverage of quantity isn’t quite needed for the long term.

 

Insurance Sector New Rule by BNM

Under the latest Bank Negara compliance issue, foreign insurers listing in Bursa Malaysia requires a 30% shareholding by local investors. In the report below by CIMB, they view that we would likely see IPOs coming in for large cap insurance companies such as AIA, Great Eastern and Prudential coming into the market.

They would be required to open up their holdings to local investors let it be retail or institutional.

Another alternative would be seeing more and more M&A activities happening. Nothing much to recommend here but its a good head up for now.

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Guocoland Taking the Turn Higher?

If you look at iSaham’s data (click for link) and sort if by 3 year revenue growth, one of the biggest would be GUOCO which currently sees very little movement on its stock price.

Based on the chart, a very strong support can be seen at RM 1.10 and merely the recent turn up might be a good sign to buy. The good thing about this chart is that there are plenty of support while resistance merely has one that is significant which is at RM 1.41.

We haven’t back check the facts on where iSaham get the numbers for revenue growth but the estimate should fair just right for now.

We think that this stock isn’t something that would move rapidly but more like a 2018 story. We suggest that you could start acquiring now or wait for weakness depending on your risk appetite. It would definitely take awhile before markets begin to revalue the stock.

In the meantime, keep this in your watchlist!