A few weeks ago almost every research house on the street were publishing recommendations on how to play the election in the stock market. Their reasoning was that the government will continue to pump prime the economy. So GLCs such as UEM, ECM, YTL Corp, ICP were being touted. Here’s what DB analysts had to say at the time:

“The election outcome is unlikely to be too surprising and hence, we believe it is unlikely to rock the market. We continue to believe the market will remain defensive amidst global volatility. “

Guess what? Over the weekend they all had a crash course on why one shouldn’t play the market on events and a reminder that they are analysts and not prophets. At last count UEM - down 20%, YTL - down 12.5%, ECM - down 19.8%.

So how does one prepare against such events? Well, the answer is not so clear-cut, but as always, it involves looking at the market and examining the writing on the wall. Last year we had the sub-prime crisis markets such as Japan and US reached a top. And remember the frightful few days when the Hang Seng lost 7000 points from 30,000 just on liquidity scares alone? Since then all those markets have been bearish. There are times when you just have to call a bear a bear.

Now, at trading school they always teach you to avoid developing any views on market direction based on news alone and that it is always the market’s reaction to the news which is important and not the news itself. So although the election results don’t actually have any impact on government policy, the market’s reaction to it is extremely negative. Every week there are many news events. Election results are only one of them (albeit very important), economic results, company results, political news etc. etc. Predicting whether the market will react to any one set of news, and if it does so, in which direction, is extremely difficult. But my point is that if you have a set of collective events which the market has been reacting to negatively starting from the sub prime crisis to the write downs of financial institutions to the liquidity scare, then it is likely that the bears will continue to react negatively to news going forwards.

In the case of Malaysian election results this is no different. If you put yourself in the shoes of an international hedge fund manager, you will not know who the DAP or PAS is, much less its candidates. You may have heard of Anwar Ibrahim, but you would not know much about his views - in particular whether he was business-friendly or not. And when you hear that the opposition has upset the government in its worst performance in 50 years, you’d probably be wondering whether there was something wrong with the country. Who cares? Hong Kong is looking cheap at moment. Let’s play it safe and put our money there…

If I had to surmise why the stock market is down today, this would be reason.

But my dear readers! If you live in Malaysia you will, for once be at an advantage to the international community. We know who DAP and PAS are, we know why they won, we know who won, and we know what they are like. Because of that, most importantly we have information which the international community doesn’t and we will be able to make a better assessment of how things are going to move forwards for Malaysia from here. For once, you will have better information compared to some research analyst working for an investment bank who does not even live in your country or in your world.

Although I encourage you to all make your own assessments as to whether the fears are founded or not, I offer my own analysis.

Firstly, BN still has a majority. It doesn’t have two-thirds anymore, but it is still the ruling party. Secondly, there is no opposition, there are 3 parties (DAP, Keadilan and PAS) splitting the gain between them (albeit pursuing the same election strategy). Thirdly I have not read anything published by any of the parties indicating that they were anti-free market or anti-commerce. No matter how much I try, I cannot imagine a situation where the economy will suffer because of this. The only scenario where this can happen, which is the scenario that BN likes to dwell on, is that it will create tension amongst the local population.

Although I agree that it will, I cannot imagine that this is a bad thing. I mean, we all want our country to remain competitive and we all want our stock market to be strong so that prices can go up. How on earth are we supposed to achieve that without competition? And how can we have a competitive market if we don’t have a competitive government? To me this is the first step in the long road towards real development, and although history will probably not look too kindly on Badawi, I feel that he has been somehow instrumental in helping give Malaysians a real voice this time. Mahathir may be right in thinking that had he still been in power then this would not have happened, but I don’t think that Malaysia would have been a better place. I don’t believe that the opposition are anywhere nearly as strong as they need to be to disrupt the government, and I don’t believe that there is any reason why our companies cannot continue to build and generate profits. I think that it will bring some much needed accountability to the government, and maybe, just maybe, somebody will wake up and realise that they are have to start delivering some results to the people of Malaysia.

I smell blood on the streets, which is my cue for going in. Time to pick up some blue chips for cheap!!