Malaysia’s markets face short-term pain after shock power shift

• May 10, 2018

Malaysia’s markets, among the best performers in Asia, may suffer a short-term blow after former prime minister Mahathir Mohamad unexpectedly led the opposition to power, with investors waiting for clarity on the nation’s first new government in six decades.

The stock index may drop as much as 8 percent within three days, according to Affin Hwang Asset Management Bhd. The ringgit will probably test 4 against the dollar when markets reopen on Monday, said SEB Skandinaviska Enskilda Banken AB. Campaign promises, including a plan to abolish a consumption tax, may be credit negative, according to Moody’s Investors Service.

Most investors had expected that the incumbent Barisan Nasional coalition would be returned to power, ensuring a continuation of policies that had propelled growth to the fastest in three years. The historic victory by the 92-year old Mahathir brings to power an untested alliance, though his leadership may reassure markets worried about the new government’s agenda.

“We think policy uncertainty will fade as the incoming government clarifies its position,” said Gan Eng Peng, director of equities strategy and advisory at Affin Hwang Asset Management in Kuala Lumpur. “Looking a bit further, it is easy to see what the script could be – Malaysia will be touted as a reform play after a reset on 60 years of policies and on the back of a healthy economy.”

Strong economic growth and a recovery in crude prices have burnished sentiment toward Malaysia this year. The ringgit has outperformed all its emerging Asian counterparts this year, and global funds have plowed more than US$600 million into local equities, helping to send the FTSE Bursa Malaysia KLCI Index to a record close in April.

Nomura’s Next Funds FTSE Bursa Malaysia KLCI ETF slipped as much as 5.4 percent, in Tokyo, the most since December. One-month non-deliverable ringgit forwards sank to 4.0930 per dollar Thursday, the lowest since December. The ringgit touched a four-month low of 3.9507 on May 8 before the election. The country’s 2045 dollar bond reached a 2016 low, while credit risks advanced. State fund 1MDB’s $3 billion bonds due 2023 were indicated down 6-10 cents on the dollar, traders say.

“Initial reaction will be negative ringgit,” said Sean Yokota, head of Asia strategy at SEB. “Once we get more clarity the fundamentals take over. With oil recovering and global growth doing well, the ringgit can take the loss generated from the political uncertainty.”

Below are other views on the outlook for Malaysian markets:

Unclear Policies

Bank of Singapore, James Cheo, investment strategist:

* Opposition policies at this point are very much unclear. During the election it was centered around anti-corruption and populist measures, which are in some ways hard to define by the market

* Investors could reconsider their positioning in Malaysia, at least for the short term until there is more clarity

* If the pullback is big enough, perhaps banks, airlines, construction, infrastructure companies could be interesting

GST Question

BNY Mellon Investment Management, Aninda Mitra, senior sovereign analyst:

* The Malaysia election outcome is a huge upset, no pollster was expecting this. This upset ranks up there with Brexit and Trump election

* However, I can’t see realistically how they can unwind GST. It contributes as much as around one quarter of total federal government revenue and cannot be easily substituted by other revenue sources

* While a long-term fix of governance, institutions and public life is now in sight, near-term policy uncertainty will be high. That will take a toll on the ringgit at least until more clarity emerges

Overwhelmingly Bearish

Affin Hwang Asset Management , Gan Eng Peng, director of equities strategy and advisory:

* The street is overwhelmingly bearish if the opposition wins. We are on the contrary, bullish. We think policy uncertainty will fade as the incoming government clarifies its position

* The economy is healthy. The key policies proposed by the opposition including the removal of GST, and targeted fuel subsidies will push out the deficit, which is a concern for the bond market as 40-50% of the market is foreign funded

* A sharp market correction will be a buying opportunity for the following reasons – fading uncertainty leading to reform play, strong domestic liquidity support, examples of overseas market reaction and a healthy economy

* We would go for politically neutral businesses, and the consumer sector stands as out as major beneficiary as GST removal, fuel subsidy and minimum wage realignment puts more money into the hands of the consumer.

Source: http://www.thejakartapost.com/news/2018/05/10/malaysias-markets-face-short-term-pain-after-shock-power-shift.html