LAST week, this column highlighted five key elements that will dictate global markets and of course these global economic factors, which are universal, will also have an impact on the local economy in general and more specifically, the financial markets.

Index wise, the FBM KLCI, which closed the year 2020 at 1,627.21 pts or up 2.4%, the first annual rise of the benchmark index in since 2017, is now estimated to have a fair value of 1,756 pts this year, based on brokers’ estimates.

Effectively, consensus fair value for the 30-stock index is pencilling a near 8% rise on the index from last year’s close.

So, what will impact markets and economy this year other than those five global factors mentioned last week? Provided below, three key elements that can dictate the local market’s direction in the year 2021, summarized in the form of three Es.

The first ‘E’ is for the Economy

Budget 2021, which was tabled in early November last year, was given the green light by Parliament last month.

The key in the budget measures are in actual fact related to government’s commitment to raise development expenditure to RM69bil as well as to provide the right stimulus to the economy as Malaysia opens up in a post pandemic world.

At the same time, in March, the government is expected to table the 12th Malaysia Plan (12MP), which will shape the nation’s direction over the next five years and up to 2025.

This is perhaps the mid-term plan of the Shared Prosperity Vision (SPV) 2030 that was announced in late 2019 as Malaysia readies itself for the future.

There were many inspirational targets that were set in SPV 2030 but much of these would require funding.

As it is, the government needs to ensure that it stays the course in meeting key benchmarks, especially those related to debt/GDP, budget deficit and debt service ratios that the rating agencies are closely monitoring.

Hence, it’s ability to remain the economic catalyst during the 12MP will not be easy.

Going back to Budget 2021, the projected revenue and expenditure for the year is ambitious based on the assumed GDP growth of between 6.5% and 7.5%.

Any shortfall in revenue or higher than expected expenditure could make the government’s financial ratios worse off and this would have dire consequences on our ratings.

After Fitch had downgraded us “BBB+” last year, further deterioration in our fundamentals will leave the door wide open for the other two rating agencies to follow suit.

Nevertheless, the government’s development expenditure should drive infrastructure spending and along with that the construction and related sectors should indirectly benefit from increase in business activities.

The second ‘E’ is for Elections

Barring unforeseen circumstance, especially in relation to Covid-19 and based on the assumption that the virus will be back under control, Malaysia is set to go to the polls this year, two years ahead of the five-year term since the last general election.

Timing of the 15th General Election (GE15) is difficult to pinpoint at this moment but the clue will definitely be how we are able to tackle the spread of Covid-19.

The current fragile political landscape has indeed cost us dearly, as the nation has been stuck in this limbo for a while now.

As a result of the slim majority presently held by the government, the endless politicking has been the order of the day since GE14.

The issue with the Malaysian political system is that we are now in a very fragmented situation where coalition politics will be main feature of the political landscape and not based on a single party rule.

Hence, jostling of numbers or popularly known as the “numbers game” will remain the key.

As it is, as we are just one week into the year, Umno is already calling for GE15 to be held by Q1 this year, provided Covid-19 is contained, and voicing out its intention to contest all the seats that belong to the party.

As Umno has made known that the party will remain in the government only up to the time snap polls are called, this indirectly suggest that the coming GE15 will be a crowded affair with multi-cornered fights, especially in Malay-majority seats.

Lawmakers, despite having vested interest, should approve a proposal to make party hopping illegal in the eyes of the law.

The uncertainty has created an impact on Malaysia’s political standing among investors as Malaysia has always been seen as a nation with strong political stability.

Businesses require government of the day that is stable, visionary and consistent in its policies and not one that is watching is back, lacking in direction or worse, flip-flopping on policy matters.

Having said that, GE15 will nevertheless be a distraction for the market and until and unless the dust settles with a clear winner, the market will be adopting a wait-and-see attitude.

Should GE15 be called, the market will likely go through a corrective phase first as investors re-assess their risk exposure and await the outcome on what will be labelled as the “battle royal” between at least two and up to four formidable sides or coalition of parties.

The third ‘E’ is for Earnings

Other than the steep rebound in earnings post the Asian Financial Crisis of 1998, corporate Malaysia is now forecasted to deliver a mind-boggling 43.4% growth in earnings this year.

This comes after a 17.8% drop in earnings for the year 2020, based on current estimates. This is not only driven due to the base effect but also to a certain extent, much higher commodity prices.

Brent oil closed the year 2020 at US$51.80 per barrel, down 22%, while crude palm oil, based on the benchmark third month forward contract, closed last year at RM3,600/MT, or up more than 18% y-o-y.

While the annual price change of these two commodities can be said to be mixed, what is amazing is how much prices had recovered from the 2020 lows.

Brent closed the year 2020 higher by 135% from the year’s low of about US$20/barrel while CPO gained as much as 85% from the low of just RM1,946/MT.

With economic momentum back, barring unforeseen circumstances on the spread of Covid-19, higher commodity prices will see our resource based companies doing much better in 2021 compared with last year.

The oil & gas sector as well as planters are expected to see renewed interest among investors as higher commodity prices will lead to brighter outlook, higher earnings and of course, better dividends.

The local stock market will also be dictated by global geopolitical events, in particular the US-China relationship during Biden’s presidency.

In addition, how the covid-19 and vaccine rollout will playout, the impact of potentially stronger Dollar, higher interest rates as inflation is expected to return this year, will be the key to any change in expectations for 2021.

Nevertheless, pent up consumer demand and the post-pandemic consumer behavioural patterns are some of the positive factors that will drive economic and earnings momentum, while outcome of the GE15 could potentially be a wild card.

Hence, performance of the stock market in 2021 is dependent on how these 3Es play out over the next 356 days.

This article was first published here.

Photo by Travis H on Unsplash.