`Buy the Dip' Rules in Malaysia as Markets Shrug Off Vote Shock

(Bloomberg) -- Malaysia’s markets showed few signs of investor panic after Mahathir Mohamad swept to power in a surprise election outcome.

Stocks and the ringgit recovered from an early slump to climb higher, as concerns over an untried government were allayed by the appointment of experienced advisers including a former central banker and finance minister. Bonds pared losses.

“We have turned mildly positive over the short term,” said Danny Wong, chief executive officer at Areca Capital Sdn. “Most of the local funds have turned slightly positive with more clarity from Mahathir," he said, citing the appointment of key ministers and the formation of a council of five elders. “Confidence is returning.”

Mahathir has sought to reassure the markets by appointing a finance minister seen as a safe pair of hands, while saying he would lead a business-friendly administration. CIMB Group Chairman Nazir Razak, brother of ousted prime minister Najib Razak, expressed optimism last week that financial markets can weather the political transition. Still, Moody’s Investors Service and Fitch Ratings have warned of risks to the budget if a consumption tax is abolished and not offset by other revenue-raising measures.

Read more about Malaysia’s new finance chief here.

Here’s a recap on market moves:

  • The FTSE Bursa Malaysia KLCI Index of stocks climbed 0.2 after dropping as much as 2.7% at the start of trading
  • The ringgit rose 0.1% at 3.9475 per dollar, after sinking as much as 1%
  • The yield on 10-year sovereign debt slid 1 basis points to 4.12 percent

“The knee-jerk selloff is an expected market impulse,” said Winson Phoon, head of fixed-income research at Maybank Kim Eng Securities in Singapore. “The selloff provides buying opportunity, and we’re mildly positive on local bonds.”

On Saturday, the central bank reaffirmed the strength of the economy and said it’ll continue to ensure orderly conditions prevail in onshore financial markets. The ringgit will reflect Malaysia’s fundamentals over the longer term, with the economy backed by a current-account surplus, healthy reserves and low external debt, Governor Muhammad Ibrahim said.

“The appointment of Lim Guan Eng as the minister of finance, as well as the formation of the Council of Elders comprising eminent Malaysians to provide advice to the new government was well received in Malaysia,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. “While there will be near-term uncertainty over the fiscal impact of the new government’s policies, especially abolishing GST and reintroducing targeted fuel subsidies, higher oil prices will provide a boost to government revenues.”

Other than Lim, Mahathir brought back former central bank Governor Zeti Akhtar Aziz and former finance minister Daim Zainuddin to an economic advisory board.

The Pakatan Harapan coalition had campaigned on a promise to scrap a consumption tax within its first 100 days in power, reintroduce gasoline subsidies and review toll road concessions. In a Thursday press conference, Mahathir emphasized his focus on expanding the economy and reducing debt.

Malaysian stocks had risen to a record close in April as global funds invested more than $600 million into local equities this year. The ringgit has benefited from a recovery in crude prices and is Asia’s best performer over the past year.

“There are two sentiments in play in the markets now,” said Ang Kok Heng, chief investment officer at Phillip Capital Management Sdn. “The bull case would be for consumer stocks and exporters benefiting from a weaker ringgit, the bear case would be stocks linked politically to the previous government and construction stocks.”

©2018 Bloomberg L.P.

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