Mahathir came out blazing in the short, sharp election lead-up. Many speculated whether his bold promises and fired-up rhetoric attacking perceived corruption could jeopardise the BN’s six-decade winning streak. But few imagined he would actually pull it off. In the end, the call for political change was strong enough to surmount even the incumbent administration’s alleged gerrymandering and election date manoeuvring.
Mind the volatility
Malaysian markets are likely to be volatile, in the short term at least, while the ringgit (MYR) could come under pressure as investors digest the broader implications of Mahathir’s policies. His pledge to remove the wildly unpopular yet fiscally significant goods and services tax (GST) will be closely watched, as will any shift in stance towards overseas investment. He also promised to reintroduce fuel subsidies and revisit large infrastructure projects, such as High Speed Rail.
Sentiment could sour initially on companies perceived to have ties to the outgoing administration, as well some importers and infrastructure firms. Conversely, exporters and consumption-related businesses might benefit from higher disposable incomes, while elevated oil prices should underpin the oil and gas sector.
On the plus side, Mahathir is inheriting an economy in good shape. Setting aside the political debate, Najib did preside over a fruitful period for the country. Growth accelerated at its fastest pace for three years last year, on the back of robust exports and domestic demand.
Bank Negara Malaysia (the central bank) expects 2018 to be another decent year, with growth between 5.5%-6%, helped by budgetary stimulus in the form of tax cuts, public-sector bonuses and increased subsidies. It remains to be seen whether the election result will alter this trajectory. However, Mahathir has plenty of experience, having previously led the country for more than twenty years. Pragmatic and steady, he’s likely to take a market-friendly approach as he pursues more inclusive growth.
Structurally sound but risks remain
Malaysia is structurally less vulnerable to external shocks these days, partly thanks to its current account surplus and improved reserves; however, it’s not immune. Any deterioration in global trade conditions and subsequent Chinese slow-down would be particularly damaging, given the economy’s heavy reliance on exports.
Still, for all this, it remains a market worth keeping an eye on. The ringgit (MYR) was one of the world’s best performing currencies last year, even amid US dollar strength, after caps were imposed on resident exporters’ foreign currency holdings in late 2016. This, combined with benign inflation, prompted the central bank to assume a less hawkish tone (it raised interest rates in January, for the first time since 2014).
The equity market is fundamentally more expensive than its broader regional peer group due to strong domestic investor support. However, it also exhibits some attractive defensive characteristics, particularly in the event of a stronger US dollar, including a tilt toward non-cyclical sectors like telecommunications and utilities.
Fidelity investment desk views:
George Efstathopoulos, portfolio manager, multi asset: “The lengthy rally in both equities and MYR over the last year has eaten into their previously attractive valuation discounts, even after the recent pullback. Certainly, anything that facilitates a slightly higher valuation cushion in either market could create buying opportunities. But, from an investment perspective, it seems sensible to take a more tactical approach for now, to MYR in particular; a position that has become even more salient in light of the election result. Until the dust settles on a new era in Malaysian politics, it pays to be prudent.”
Teera Chanpongsang, portfolio manager, equities: “Short-term, we may see market volatility given uncertainty around policy implementation. I have been underweight Malaysia for the past few years given risk reward and valuation issues. However, we may see some opportunities should policies move in the right direction. At Fidelity, our analysts and I spend the majority of our time looking for individual investment opportunities on a stock-by-stock basis with in-depth analysis.”
Madeleine Kuang, portfolio manager, equities: “The Malaysian election delivered an unexpected surprise and while the market is closed, the reaction is telling with the ETF down as much as 9%. Short term, we expect uncertainty to linger with the key player being former deputy prime minister Anwar Ibrahim, his ability to keep the government together and deliver on the election agenda. Hence, market movements likely to be unpredictable. Longer term, the outcome is positive as Malaysia starts off on a renewed slate, however getting the economy back on track is critical. Sector wise, I am positive for exporters in the short term and negative for construction names.”
Bryan Collins, head of Asian fixed income: “We were expecting an abnormal election and hence, were positioned accordingly in our funds. We are looking at when to buy given most of these pre-election promises are not adhered to. Back in the day, Mahathir was a pragmatic person and is less likely to completely close the economy. After the initial kneejerk reaction of all fixed income asset classes, credit will likely be anchored by rating agency expectations. Inflation dynamics in the near term support lower rates for longer, so we would look into buying back our short local rates positions. MYR is more volatile to these uncertainties, but a lot of speculative positioning has eroded away.”
