Monday, October 3

Election outcome dictates new market script for Malaysia

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KUCHING: In a first of its kind, the opposition winning 14th General Election (GE14) set a precedence towards a new script for Malaysia’s market.

International ratings agency Moody’s Investors Service believed that Pakatan Harapan’s win marked uncharted territory for Malaysia as the country has never witnessed a transition of power away from Barisan Nasional since independence in 1957.

In a statement, Anushka Shah, Moody’s vice president and senior analyst of sovereign risk group said little was known about the opposition’s full range of economic policies, and electoral pledges lacked details that would allow for a fuller assessment of the budgetary and macroeconomic impact.

“Some campaign promises, if implemented without any other adjustments, would be credit negative for Malaysia’s sovereign.

“These include a proposed abolishment of the Goods and Service Tax or GST, which, without offsetting measures, would increase Malaysia’s reliance on oil-related revenue and in the near term at least, narrow the government’s revenue base,” she added.

Anushka said another policy pledge, the reintroduction of fuel subsidies, would also distort market-determined price mechanisms, with an effect on both the fiscal position and balance of payments.

Meanwhile, Gan Eng Peng, Affin Hwang Asset Management director of equities strategy and advisory, took comfort in the fact that major regime change in overseas markets only had short term negative impact to markets.

He said for example, the Thai military coup of 2014 drove out foreign investors but strong domestic liquidity boosted the market for a full recovery within six days.

“The correction from Brexit only lasted three trading days,” he added in a separate statement yesterday.

“Similarly, the impact from Donald Trump winning the US presidency lasted just three hours. The unfavourable referendum for Italian PM Matteo Renzi only had a three-minute negative effect.

“Like the Thai market, Malaysian market has strong domestic liquidity support in the form of government private sector funds. Retail and foreign investor participation are in the minority.

“Fundamentally, the economy is healthy. The key policies proposed by the opposition – the removal of the Goods and Services Tax, targeted fuel subsidies – will push up the deficit, which is a concern for the bond market as 40 to 50 per cent of the market is foreign funded. The Ringgit might take a hit because of that. But looking a bit further out, 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.”

As such, Gan believed a sharp market correction would be a buying opportunity for the following reasons – fading uncertainty leading to reform play, strong domestic liquidity support, examples of overseas market reaction and healthy economy.

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

Whilst an opposition win raises questions about government regulation and economic policies, Gan viewed that such concerns on policy uncertainty will fade as the incoming government clarifies its position.

“All markets dislike uncertainty and we expect this could lead to bigger discounts with the adjusting factor being lower share prices overall. This would be the immediate reaction as the sell off will be broad-based.”