Target 2013 FBMKLCI: 1,760.
The UMNO election marks a good time to position for a year-end uptrend. As UMNO gears up for its triennial party election which will be held on 19 Oct 13, we expect the upcoming UMNO party election results to be largely marketneutral. The election results should affirm the country’s pro-business policies, the political will to curb the country’s fiscal deficit, with limited fiscal pressure on the just-announced Bumiputra Economic Empowerment policy.
• The election is a good time to start positioning for year-end uptrend. As UMNO gears up for its party election which will be held on 19 Oct 13 ahead of its General Assembly (GA) on 2 Dec 13, we expect the upcoming UMNO party election results to be largely market-neutral - ensuring continuity of pro-business and fiscal consolidation policies. While UMNO typically holds its party elections during its GA, this year’s would be held in October (ahead of the GA in Dec 13) as polls were due in Mar 12 but were delayed by 18 months to prepare for the 13th General Elections which were held in May 13.
• We do not expect material challenge to the PM or DPM as party president and deputy president respectively, nor changes to the leaders of its Youth, Wanita and Puteri wings. Recent changes allow all the >130,000 UMNO members to participate in the polling process.
• Positive market bias in post-UMNO party elections. A review of UMNO’s past elections have shown that the FBMKLCI has generally trended higher pre- and/or post-GA (although this in part could be attributed by the December effect as the party GA is typically held towards year-end). While there have been no clear, consistent winners among GLCs and politically-linked stocks around these periods, we do note that Affin Holdings and Time dotcom had periods of outperformance vs FBMKLCI around the recent UMNO events.
• The PM also announced new Bumiputra economic empowerment programmes (BEP) to enhance the community’s economic participation, in thanking the bumiputra support during this year’s general election. Key measures included the call for GLCs to strengthen their Bumiputra vendor development systems, and extending the ‘carve out policy’ (which was implemented in the MRT projects) to other mega projects. Other measures such as a second Skim Amanah Saham Bumiputra, property development and ownership plans and additional allocations, grants and incentives were also unveiled (refer to RHS tables).
• We continue to advocate a balanced portfolio. OVERWEIGHT highyielding companies in the telecommunications and number forecasting operator (NFO) sectors, as well as selected construction, O&G and those with exposure to Iskandar, which are ETP beneficiaries. 4Q13 investment themes include Selangor water privatisation, land value enhancement from the second Penang bridge opening, and positioning for 1Q14’s anticipated policy rate hike (although bank stocks are still sidelined on concerns of an uptick in NPL recognition). Maintain UNDERWEIGHT on cyclical sectors, particularly autos.
• Our top picks are DiGi.Com, Gamuda and Magnum, and we also like Axiata and SapuraKencana. Situational plays include IOI Corp and IJM Corp.
• Bumiputera companies that should benefit from the new Bumiputra programmes are proven Bumiputra companies in the oil & gas (SapuraKencana), construction (AZRB) and property sectors. Other beneficiaries could include MMC.
• Better market performance post-elections. Revisiting our analysis on market performances, the past five UMNO GAs and one UMNO election saw overwhelming consistency of the index churning positive returns both a month and two months after the events. Market returns have also been overall positive for the one- and two-month periods before the events, but not as convincing as the post-event performances (see charts below).
• BEP adds strength to capable Bumi companies. We do not expect the BEP to be a setback to 1Malaysia and the New Economic Model, nor raise undue concerns over the implications of the ‘carve out’ policy on the country’s overall competitiveness and progress of reforms. Rather, we expect investors, amid ample trading liquidity, to focus on the potential beneficiaries of BEP, eg vendors to Petronas, TM, TNB, UEM, Felda & Sime, although we reckon that the key beneficiaries are Bumiputra SMEs.
Publish date: 17/09/13