Hong Leong Asset Management Bhd. is favoring shares of Malaysian consumer-staple and health-care companies over stocks that may be directly affected by the outcome of elections due by early next year.
Investors should avoid financial, construction and property companies that depend on government projects and spending, according to Chief Executive Officer Geoffrey Ng, whose Kuala Lumpur-based firm held about $1.5 billion as of July 6. Hong Leong Asset’s consumer-products and balanced funds have beaten at least 90 percent of peers in the past three years.
“Our medium-term strategy in the run-up to the general election is to be cautiously optimistic on the market, only taking positions in apolitical stocks,” Ng wrote in a July 6 e-mail. “We suggest exposures to defensive sectors that are politically agnostic.”
Prime Minister Najib Razak, who must call for elections by early next year, unveiled a program in 2010 that identified $444 billion of private sector-led projects from mass rail to oil storage to boost economic growth. Speculation the projects will bolster building companies’ earnings drove the Bursa Malaysia Construction Index to a six-month high on Feb. 9. The gauge has since fallen 11 percent, compared with the benchmark FTSE Bursa Malaysia KLCI Index’s 3.8 percent advance.
Large-scale building projects, such as a mass-rail network in Kuala Lumpur that is still undergoing a feasibility study, could face reviews or potential delays if the election results “turn out to be unfavorable,” Sharizan Rosely, an analyst at CIMB Group Holdings Bhd., said in a report dated July 4.
“In the worst-case scenario, major projects could be reviewed and possibly deferred or canceled,” Sharizan wrote. “This scenario is reminiscent of the post-2008 general election which affected several mega jobs.”
The construction index tumbled 29 percent between Feb. 13, 2008, when the then Prime Minister Abdullah Ahmad Badawi dissolved parliament, and March 10 the same year, the first trading day after the general election that saw the ruling National Front coalition losing its two-thirds majority for the first time since 1969. The KLCI gauge sank 9.5 percent on the day after the election.
The KLCI gauge has gained 6.1 percent this year, compared with a 2.4 percent increase in the MSCI Emerging Markets Index, as Europe’s debt crisis and concerns over global economic growth drove investors to less risky assets. Malaysia’s stock measure is trading at 14.9 times estimated earnings, compared with the emerging-market index’s multiple of 10.2 times, according to data compiled by Bloomberg.
The KLCI gauge closed at a record 1,624.29 today. The measure was the least volatile among the key indexes of Asia-Pacific markets worth more than $100 billion in the year to June 29 with a reading of 11.36, according to the Bloomberg Riskless Return Ranking.
Overseas investors sold a net 800 million ringgit ($251 million) of Malaysian stocks last month after buying 10 billion ringgit in the October-to-May period, stock exchange data show.
Stronger domestic consumption and initial public offerings such as Felda Global Ventures Holdings Bhd.’s $3.3 billion sale, the world’s second-largest IPO this year after Facebook Inc., helped boost portfolio inflows and have “largely negated political risk concerns for the time being,” Hong Leong’s Ng said.
“We expect the Kuala Lumpur bourse to experience volatility and lower trading liquidity once elections are announced due to investor uncertainty regarding the possible electorate outcome and in light of the surprise results of the last general elections in 2008,” Ng said.
Hong Leong is also favoring glove makers, retail-based property trusts and selected plantation stocks, Ng said. Hong Leong Asset Management Bhd. is a unit of Hong Leong Capital Bhd., which in turn is a unit of Hong Leong Financial Group Bhd.
Hong Leong Consumer Products Sector Fund, which outperformed 90 percent of its peers with a 26 percent return in the past three years, owned shares of Carlsberg Brewery Malaysia Bhd. and Dutch Lady Milk Industries Bhd. as of May 31, according to a monthly factsheet on the company’s website. Dutch Lady has gained 54 percent this year, while Carlsberg Brewery has surged 42 percent.
Hong Leong Balanced Fund, which beat 97 percent of its peers with a 22 percent three-year return, invested in equities and fixed-income securities, including shares of QL Resources Bhd. as of May 31, according to the factsheet. QL Resources, a fishmeal producer that also runs livestock farming and oil palm plantations, has advanced 4.9 percent this year.
“Given global macro headwinds and general election risks on the home front, we believe it pays for the more discerning investors to hold some defensive stocks that have strong cash flows to pay sustainable dividends in their portfolios,” Lim Chee Sing, head of research at Kuala Lumpur-based RHB Capital Bhd., wrote in a report dated July 3.