KUALA LUMPUR: The domestic stock market will likely react negatively to uncertainty as foreign and local investors adopt a wait-and-see attitude until there is greater clarity on the coming elections.
Given the looming global downturn and political uncertainty on the local front, economists believe the stability of a new administration will augur well for the stock market.
Minority Shareholder Watch Group (MSWG) chief executive officer Devanesan Evanson said the stock markets prefer certainty and predictability.
Devanesan said this is because the markets tend to discount this uncertainty through stock prices.
"It is understandable if foreign and local investors adopt a wait-and-see attitude until there is greater visibility. The past few years have been tumultuous with changes in government and leadership," he told the New Straits Times.
Putra Business School associate professor Dr Ahmed Razman Abdul Latif said an early general election would not scare foreign investors. However, the outcome of the election could impact their decision.
Razman said this is especially true when there is no clear majority for any coalition, resulting in a hung government.
"If the elected coalition has a strong majority and is thus stable, this will increase investors' confidence in the country's economic prospects.
"If there is no clear majority among the coalitions, this will create the impression that the political uncertainties which started in 2019 until now will continue for the next five years.
"This will result in investors shying away from investing in Malaysia," he said.
Meanwhile, Malaysia University of Science and Technology lecturer Professor Geoffrey Williams said this is a bad time for an election because it has disrupted the 2023 Budget, which is now abandoned and will have to be retabled under a new government.
Williams said if there are changes in the 2023 Budget, which is likely in any election outcome, then it will not help foreign investors to understand the direction of economic policy.
"There are different scenarios for the economy based on the outcome of the election.
"If there is a hung parliament and frantic negotiations to build a coalition, then we will be in GE14 territory again, and markets will worry whether any coalition will survive.
"The nation will struggle to see a clear economic scenario for the 2023 Budget or long-term development and reform. This will be a problem and will scare investors," he said.
Affin Hwang Asset Management Bhd (Affin Hwang AM) analyst believes investors will stay sidelined until there is greater clarity on political developments.
The firm said market movements are expected to stay choppy, given the political overhang in markets until elections are decisively concluded.
However, the downside appears limited given that the odds of an early election have already been well priced-in in the recent correction.
Looking at valuations, the KLCI is currently trading at 12.5 times on a blended 12-month forward price-to-earnings (P/E), which is close to its pandemic lows in 2020.
"The current market base-case is that Barisan Nasional (BN) could muster a sufficient majority to form a new government.
"Investors may view this outcome positively as markets believe it signifies policy continuity, where any new fiscal budget would be similar to the recently tabled.
"The worst outcome for markets would be a hung parliament which would engender more political instability," it added.