Malaysia’s Markets Face Short-Term Pain After Shock Power Shift

(Bloomberg) -- 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 for the first time in six decades, leaving investors waiting for clarity on policy changes.

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

“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.”

Nomura’s Next Funds FTSE Bursa Malaysia KLCI ETF slipped as much as 5.4 percent, in Tokyo, the most since December. 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.

Trading in one-month non-deliverable forwards on Thursday imply that the ringgit will be 4 percent weaker when onshore markets reopen. The ringgit touched a four-month low of 3.9507 on May 8 before the election.

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

Known Entity

MUFG Bank Ltd., Sook Mei Leong, Southeast Asian head of global markets research:

  • He was a prime minister before. It’s not like you’re going to see major short-term disruptions, but on the other hand when he was campaigning he was introducing a lot of schemes that are totally different from what the current government has been doing
  • Markets may not necessarily take it so negative

Fiscal Discipline

Janus Henderson Investors, Sat Duhra, portfolio manager for Asian dividend income strategy:

  • Given the currency move and uncertainty as to how this coalition will operate it is fair to expect some dislocation in Malaysian markets. The unwind of GST and return of subsidies would be a concern from a fiscal discipline point of view, and similar to India and Indonesia there are questions about widening deficits
  • It does at least send out the message that Asian investors will not tolerate poor governance with the previous leadership mired in scandals. This is a key theme for Asian markets with even the likes of Korea focused on improving corporate structures and governance

Consumer Stocks

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
  • A sharp market correction will be a buying opportunity for the following reasons - fading uncertainty leading to reform play, strong domestic liquidity support, and a healthy economy
  • 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

©2018 Bloomberg L.P.

Bloomberg
Stay Updated With Stock Market News on BloombergQuint