(Bloomberg) -- Uncertainty is running high for Malaysia’s markets as the country heads to the polls, with foreign inflows at risk as a decisive vote appears increasingly elusive.
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More than 21 million people will cast their ballots on Saturday to elect the country’s fourth premier in as many years. With more than 940 candidates vying to be part of the 222-seat parliament, the jury is out on which of the three main coalitions will be to able to form the next government.
Adding to the unpredictability this time is the influx of millions of young voters who will be voting for the first time.
READ: Race for Malaysia Prime Minister Is Wide Open Weeks Before Vote
The outcome would determine the path forward for global investors who have been net sellers of local shares after the shock defeat of the Barisan Nasional coalition in the 2018 polls plunged Malaysia into a period of prolonged political strife. Foreign shareholding in companies fell to 20.6% as at September-end from over 24% at the end of April 2018, just before the previous national vote, according to Maybank Investment Bank.
“The dynamics in Malaysian elections remain fluid,” said Stacey Neo, portfolio manager at JPMorgan Asset Management. “The market has been navigating through political uncertainties in the past years and we expect it to eventually find its own footing” supported by local investors, she said.
The benchmark stock index has rebounded after falling to more than a two-year low in October but remains 23% below its April 2018 record high.
While Malaysia’s region-beating growth in the September quarter may help ease some of the political risk, the next government will still have to steer through “a cyclical slowdown as well as rather tight fiscal space” to lure foreigners, said Trinh Nguyen, a senior economist at Natixis SA in Hong Kong.
“If the outcome is more decisive than expected, you can have a spurt of increased investment,” she said.
Here are areas investors should watch around the election:
Politicians have pledged to tackle the rising living costs and provide cash aid to low-income households. This is expected to help food and beverage makers by adding to tailwinds from the reopening of the economy that has unleashed pent-up demand.
Food producers have also outperformed prior to polling day in each of the past four general elections, according to UOB Kay Hian analyst Vincent Khoo. Fraser & Neave Holdings Bhd., whose units sell soft drinks and dairy products, may gain as demand typically spikes during election campaigns. The stock is up 4% so far this month.
The boost from the election also coincides with the quarterly earnings season, which may signal an uptrend in domestic consumption, Khoo said.
Carlsberg Brewery Malaysia Bhd.’s third-quarter profit almost tripled to 76.4 million ringgit ($16.8 million) from a year earlier, according to a filing on Nov. 11.
Large projects including the Mass Rapid Transit Line 3 are on investor radar on concerns that there may be delays in contract awards, especially if there’s a hung parliament, said Affin Hwang Investment Bank analyst Chee Wei Loong.
Gamuda Bhd., a frontrunner to build tunnels for the MRT3 project, will be one to watch. The stock is down more than 6% since the Oct. 10 dissolution of parliament, versus a 3% gain in the KLCI index. Loong downgraded the stock to hold last month.
Other companies include IJM Corp Bhd., whose likely renegotiation of highway concessions may be affected by any changes in policy.
Large companies could benefit from capital inflow if the election outcome leads to a stable political environment. Winners include some of Malaysia’s biggest banks such as CIMB Group Holdings Bhd. and RHB Bank Bhd., UOB’s Khoo said.
Fundamentally strong large caps are haven at a time of rising interest rates and shrinking liquidity globally, he said.
History shows that global funds have tended to sell ringgit debt each time an election approached.
“Markets don’t usually like uncertainty and may continue to exhibit lukewarm trading interest until the fog is cleared,” said Winson Phoon, head of fixed-income research at Maybank Securities Pte. in Singapore.
Foreigners pulling out more money may make it harder for the government to fund its budget gap. They sold $579 million of local debt in October in a second straight month of net outflows, according to the latest data.
READ: Why Malaysia Has Early Elections and What Is at Stake: QuickTake
--With assistance from Ishika Mookerjee and Marcus Wong.
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