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Published on March 14, 2008

With Malaysia's ruling party having lost several key states to opposition parties in recent elections, more foreign investors are now considering shifting their funds to Thai shares.

Global investors usually make comparisons between the two countries before allocating funds to the region.

In Malaysia, political stability has been shaken after the ruling Barisan National (BN) lost its two-thirds majority in parliament in last Saturday's polls.

In addition to losing more seats in Kelantan, it lost vital states like Penang, Kedah, Perak and Selangor.

The Kuala Lumpur Stock Index plunged almost 10 per cent on the outcome as fears mount over a reversal of government pro-business policies in those states.

"A broad mix of factors led to BN's worst election performance since independence [from Britain]. These include growing disaffection among Indian and Chinese communities over the perception of increased Islamisation of the country, rising costs of living and BN's failure to deliver 2004 election promises to stamp out corruption," said a report by Citigroup's Emerging Market Daily.

"Near term, the election results will likely be unsettling for equity markets and currency markets. Concerns over political instability and delays in the implementation of infrastructure projects will be a drag on the equity market in the near term," it said.

In contrast, Thailand's fortunes have improved markedly. Political stability appears to be solidifying under the Samak Sundaravej-led coalition government.

A recent probe of the Chart Thai and Machima Thipataya parties involved only executives for alleged election fraud, thus sparing the two parties from disbanding.

The People Power Party, whose key member, Yongyuth Tiyapairat, has received a red card from the Election Commission, may follow the same line of investigation.

UOB Kay Hain investment strategist Veena Naidu yesterday wrote in the company's Regional Morning Notes report that a strong "buy" recommendation had been given to Thai shares over Malaysian stocks, which have been downgraded.

Veena said Malaysia could see infrastructure delays from the political setback, while Thailand is poised to stimulate its domestic economy with increased public spending and spark a wave of mega-projects, including more mass-transit lines.

Meanwhile, Malaysian property companies were being downgraded because of delays, failure to obtain approvals and soft demand.

In Thailand, the government recently slashed property taxes, which will likely spur transactions in the housing market.

"Our property analyst has upgraded earnings forecasts for stocks under our coverage by 30-35 per cent, and we have lifted target prices," Veena wrote.

The Malaysian contractor sector is being downgraded because of delays in construction projects awarded under the Ninth Malaysian Plan. There are also delays in its implementation of the Automatic Pricing Mechanism for cement prices.

In Thailand, contractors are receiving greater interest among investors, because the first phase of mass-transit projects worth Bt270 billion to Bt300 billion will soon be receiving bids. Malaysia's gross domestic product may not meet its target of 6-6.5 per cent, while Thailand's growth is expected to rise above 5 per cent.

UOB Kay Hian has recommended "overweight" on Thai bank, property and media stocks.

Its top picks include Asian Property, Siam Commercial Bank, Krung Thai Bank, Banpu, PTT Exploration and Production, LPN Development, MCOT and the Major Cineplex Group.