Bank stocks poised to rise in run-up to GE16

PETALING JAYA: Malaysia’s banking stocks are likely to be favoured by foreign funds as the 16th general election (GE16) looms, said a research house.

Foreign funds have historically shown a preference for Malaysian banks in the run-up to elections, accumulating banking stocks in the months leading up to polling day, TA Research said in a report.

It noted that banks are among the most widely held Malaysian equities by both domestic and foreign institutional investors, making up a third of the FBM KLCI’s market capitalisation.

“As such, we see banking stocks often serving as a proxy for broader economic and political sentiment,” said TA, which did a deep dive into the relationship between recent general elections (GE13, GE14, and GE15) and the performance of the banking sector.

“Their heavy weighting in institutional portfolios makes them particularly sensitive to shifts in foreign positioning, often absorbing the brunt of capital flows into and out of Malaysia,” it said.

With the Johor and Negeri Sembilan state elections approaching, speculation is mounting over the possibility of an early general election.

Ironically, the investment approach of foreign institutional funds with regards to Malaysia’s elections is a double-edged sword for local banks.

TA research analyst Wong Li Hsia said foreign investors “rarely wait for the outcome of an election” – especially when it appears highly contested or unpredictable – as they will typically unwind their shareholdings way ahead of the results.

“A common thread across Malaysia’s recent election cycles is that foreign flows into banks are less about the eventual outcome and more about timing.

“Both GE13 and GE14 highlighted a consistent pattern of foreign outflows after polling day, reflecting investor caution amid political transitions,” she added.

Foreign investor positioning for GE16

In the current macroeconomic and political climate, TA noted that Malaysia’s political landscape appears fragmented and highly competitive, with coalition stability is still uncertain. Unlike GE15, it said the current environment is “considerably less supportive”.

In addition to inflationary pressures arising from the Middle East conflict, the banking sector is entering the current election cycle facing moderating loan growth, softer corporate activity, and the prospect of slower earnings growth, it added.

TA said foreign investor positioning also appears less favourable than during previous election cycles. Foreign investors have already been net sellers of Malaysian equities in recent weeks.

“We believe foreign holdings may peak earlier than in previous cycles. Investors may begin reducing exposure ahead of polling day as a precaution against potential policy uncertainty and coalition instability,” it added.

It also said mid-cap banks such as AMMB and RHB Bank have also seen a sharp rise in foreign ownership, which could leave them vulnerable to outflows if election-related uncertainty intensifies.

TA Research also downgraded the banking sector to “neutral” from “overweight”, mainly due to the heightened risk of election-related multiple compression in a less supportive macro backdrop.

Nevertheless, it said that periods of political uncertainty could present “attractive entry points” for long-term investors.

It selected Public Bank as its top pick for the sector, with a target price of RM5.36, as it has consistently demonstrated defensive characteristics across multiple election cycles.

“In the event of heightened post-election uncertainty, we believe investors could increasingly favour Public Bank as a relatively safe haven within the sector,” it added.