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Malaysia election: private banks and asset managers react

As Mahathir Mohamad claims an extraordinary victory in Malaysia's 14th general election, private banks and asset managers share their views on how this will play out for investors

Eddy Loh, Credit Suisse

Senior investment strategist Asia Pacific

The surprise election outcome in Malaysia will lead to near-term uncertainties and weigh on market sentiment.  We have already seen a knee-jerk reaction with the USD/MYR 1M-NDF spiking close to 4.20. Malaysian equities will also likely see an immediate adjustment when they re-open on Monday – as suggested by the 6% decline in US-listed iShares MSCI Malaysia ETF.

For now, the downside pressure on both the MYR and Malaysian equities will be dominant given the uncertainties – mainly over the transition to the new government and the policies it will likely pursue.  Nevertheless, Malaysia’s economic fundamentals have been robust and a rising oil price is an added positive as the country is a net oil exporter. 

The question is therefore how long it will take for Malaysia to get through this political transition phase. To that end, the new government can and should move quickly to provide clarity and demonstrate its members can work harmoniously together.

Naming a cabinet will be a good start, followed by a detailed policy agenda particularly on the fiscal front (including GST) as well as China relations and the related infrastructure projects.  Notably, Dr. Mahathir and Anwar Ibrahim, are seasoned veterans at government and are fairly well known to the international community. We thus see the main challenge for the government as demonstrating its ability to function well.

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Eddy Loh, Credit Suisse

Senior investment strategist Asia Pacific

The surprise election outcome in Malaysia will lead to near-term uncertainties and weigh on market sentiment.  We have already seen a knee-jerk reaction with the USD/MYR 1M-NDF spiking close to 4.20. Malaysian equities will also likely see an immediate adjustment when they re-open on Monday – as suggested by the 6% decline in US-listed iShares MSCI Malaysia ETF.

For now, the downside pressure on both the MYR and Malaysian equities will be dominant given the uncertainties – mainly over the transition to the new government and the policies it will likely pursue.  Nevertheless, Malaysia’s economic fundamentals have been robust and a rising oil price is an added positive as the country is a net oil exporter. 

The question is therefore how long it will take for Malaysia to get through this political transition phase. To that end, the new government can and should move quickly to provide clarity and demonstrate its members can work harmoniously together.

Naming a cabinet will be a good start, followed by a detailed policy agenda particularly on the fiscal front (including GST) as well as China relations and the related infrastructure projects.  Notably, Dr. Mahathir and Anwar Ibrahim, are seasoned veterans at government and are fairly well known to the international community. We thus see the main challenge for the government as demonstrating its ability to function well.

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Gerald Ambrose, Aberdeen Standard Investments

Malaysia chief executive officer

It’s a new political dawn for Malaysia, which may see its first ever change of government since its independence from the British in 1957. This was a stunning election outcome that few would have predicted. We would expect some market volatility from the election result and possibly some spill over impact on investments. It is likely that larger companies, many of which are government-linked, will bear the brunt of any index-linked selling which might take place in the near term.

More broadly, some of Pakatan Harapan’s (PH) election pledges may have diverging impacts on the share prices of specific sectors over the short term. PH’s intention to review all infrastructure mega-projects may lead to some initial selling in the construction and cement sectors, while its agenda to mitigate high living costs may enhance consumer sector stocks, such as food manufacturers, consumer staples and retail plays. 

Over the medium to longer term, we think the election outcome reflects a growing level of political maturity and respect for democracy that would be beneficial for the country’s appeal to foreign investors and economic prospects.

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Jalil Rasheed, Invesco

Investment director

Malaysia is in unchartered territory as it has never had change of federal government before. The market had factored in a win for the ruling coalition so there will be some outflows on expectations of policy changes. Any impact will be short term as the new government and their reform agenda (which includes institutional reforms, and review of one sided infrastructure deals) takes shape. These longer term reforms are much needed structural change that we feel Malaysia has been lacking past two decades.

Construction sector will be most impacted because the new government has announced that it will review most of the infrastructure projects. Stocks which are politically linked like certain oil & gas names will also be impacted.

Institutional reforms should lead to more independent public institutions like attorney general chambers, anti-corruption agency and judiciary. There are also plans to remove political involvement in business and removal of politicians in government linked institutions. All these are positive steps for corporate Malaysia which we as investors are looking forward to.

There will be some short term fiscal imbalance as the new government starts implementing populist measures that were promised. But longer term if they implement the reforms promised, I see this as deficit reducing due to greater transparency and governance.

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Eli Lee, Bank of Singapore

Head of investment strategy

The opposition’s stunning win, reminiscent of Brexit and the US presidential election, has kicked off a period of high uncertainty in Malaysian markets. A classic knee-jerk reaction is in play, and in this regard, it is positive to have declared 10-11 May as public holidays. This allows market sentiment to settle as we receive more clarity on policy direction from the new government.

There is as yet limited clarity on Pakatan Harapan’s full range of policies, since the main message of the Mahathir-led campaign was centered on ending corruption and “cash is king” politics. Some campaign promises, such as abolishing GST and reintroducing fuel subsidies, may boost consumption but, without offsetting measures, would adversely affect the country’s budget deficits and sovereign rating.

Mahathir has also publicly stated that he would relook Chinese investments that he alleged brought too little benefit to the country. But it remains to be seen how his rhetoric will be translated into actual policy. At a time of growing pressure on Emerging Markets (EM) currencies and bonds, the situation in Malaysia bears careful watching for potential knock-on effects, particularly as rising rates and geopolitical uncertainties remain live in the backdrop.

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Aninda Mitra, BNY Mellon Investment Management

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. This is as momentous as say PRI being dislodged from power in Mexico

UMNO led Barisan has been unseated for the first time since 1957. I believe the Ringgit will come under pressure as policy continuity will come under a cloud. The Pakatan Harapan led by an ageing Mahathir has sworn to dismantle GST and bring back subsidies and raise minimum wages.

I think there will be short term volatility. It is a significant course correction following the corruption under Najib. 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.

The bottom line is that 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.

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Philip Wee and Duncan Tan, DBS Group Research

FX strategists

Offshore Malaysian ringgit in the non-deliverable forward (NDF) market depreciated past 4.00 on an upset in the Malaysian general elections. The opposition Pakatan Harapan (PH) led by former PM Mahathir Mohamed won the majority and ended sixty years of rule under the Barisan National coalition.

Ratings agency Moody’s warned that the PH’s campaign promises – abolishing the goods and services tax and restoring fuel subsidies – could be credit negative. Like many of its Asian counterparts, the onshore spot is likely to return this year’s appreciation when it opens again.

The Malaysian ringgit would, with or without the election upset, have depreciated. Our forecast for the ringgit to depreciate to 4.20 by the end of this year was formulated before the election. This was based on our expectation for a resurgent US dollar from a more hawkish US growth/inflation/rates outlook and a moderation in the Eurozone’s momentum.

We did not expect the externally-dependent Malaysian economy to repeat last year’s stellar 5.9% growth and looked for a pullback towards 5% in 2018. While noting the benefits of rising oil prices to this net oil exporter, the downside risks from rising trade protectionism and higher US rates to its cyclical outlook could not be dismissed. On a risk-reward basis, we reckoned that consensus has been unrealistic in expecting the ringgit to extend its appreciation towards 3.80 this year.

 

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Teera Chanpongsang and Bryan Collins, Fidelity International 

Portfolio manager and head of Asian fixed income

Whilst we look at the investible universe on a stock by stock basis, broadly speaking, the infrastructure sector and companies with high import content could be negatively impacted.

Meanwhile, exporters and consumption stocks might benefit due to higher disposable incomes. Additionally, the oil and gas sector could also benefit should oil prices remain elevated. The currency (MYR) will probably weaken given the market doesn’t like uncertainties plus there are likely to be concerns over the new government’s fiscal spending.

‘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,’ said Teera Chanpongsang, portfolio manager.

‘Back in the day, Mahathir was a pragmatic person and is less likely 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,’ added Bryan Collins, head of Asian fixed income.

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Anthony Chan, Union Bancaire Privée

Chief investment strategist, Asia

Unless the equity market is going to be much oversold, it may take a while for any new policy announcement (if any?) to drive sector allocation. In fixed income space, we believe that Malaysia’s A3 sovereign rating is solid but an upgrade is not likely in the pipeline. Regarding LCB [local currency bonds], it is one of the highest foreign participated market (some 40% of total holding) in Asia thanks to its relatively high carry among A-rated peers.

Despite further upward pressure from UST [US Treasuries], there is little reason for domestic rate hike given favorable prevailing inflation trend and actually very high real rates/yields domestically (170bp for policy rate and 280bp for 10Y bond yield) even though economic growth has accelerated steadily over the past year. Bank Negara Malaysia is set to leave policy rate unchanged at 3.25% at today’s policy meeting and we expect, at best, one 25bp hike later in the year (roughly what the forward curve has priced).

Bottom line – We like Malaysia as an oil play but need policy direction to assess market allocation (local markets close for two days and reopen on next Monday). We are awaiting broader USD and UST stability (hopefully by 3Q/18 to emerge given currently very overbought USD position in the market) as guidepost to enter into local bonds. Malaysia’s strong currency fundamentals and high carry are one of our top picks regionally. We think USD sovereign remains sound, barring any major unforeseen political event post-election.

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