Investors are ambivalent over the future direction of the nation due to its heavy debt obligations and gloomy socio-political scene
By MARK RAO / Pic By MUHD AMIN NAHARUL & TMR File
Investors are still awaiting the next catalysts to lift the Malaysian capital market out from the doldrums, exactly a year since Pakatan Harapan stormed to power and made global headlines.
As the euphoria surrounding the coalition’s historic win in the 14th General Election last May dissipates, investors are ambivalent over the future direction of the nation due to its heavy debt obligations and gloomy socio-political scene.
Repairing the damage caused by the previous government has somehow slowed the federal government in answering the call for a new Malaysia among investors and fulfilling its election promises.
A legacy of debt, a hefty RM1.09 trillion or 80.3% of GDP, forced the country into a fiscal consolidation path that placed several economic stimulus packages (in the form of mega infrastructure projects) on the back burner.
This left investors contemplating a market characterised by a dearth of catalysts which the previous government was eager to fill via capital market initiatives such as cross-border trading links and stamp duty waivers.
It is thus no coincidence that Malaysia’s benchmark FTSE Bursa Malaysia (FBM) KLCI Index was the worst performing equity market among the Asean-5, declining 11.68% over the past year.
This is against the Jakarta Composite Index and the Philippine Stock Exchange stock indices which were up 8.41% and 3.4% respectively, while Singapore’s Strait Times Index and the Stock Exchange of Thailand were down by 7.26% and 5.15% respectively.
The losses were not limited to equities as bond outflows (both government- and corporate-issued) after the May elections totalled RM10.6 billion, while only RM5.6 billion of Malaysian equities were dumped that same month.
Foreign fund flow into Malaysia did turn positive in the first quarter of 2019 at RM3.8 billion — versus the RM2.8 billion in outflows noted in 4Q18 — as bond inflows offset the continued dumping of equities.
But the reality is that inflows and outflows are often outside the government’s control and a slew of external factors — namely US-China trade tensions, headline risks and slowing global growth — are muddling the outlook for Malaysian capital markets.
A Costly Inheritance
“Malaysia Baru” woke up to the disturbing reality of over RM1 trillion in accumulated debt. This had the investing world fearing austerity measures, but the country’s current account surplus (2.3% of GDP in 2018) quickly eased these concerns.
Expected to remain at a surplus this year, Malaysia’s current account is showing signs of dwindling, leading to fears that the country could soon be faced with a twin deficit — thus challenging repayment of its debt obligations.
SPI Asset Management managing partner and head of trading Stephen Innes said the dwindling current account is undoubtedly a negative for Malaysian capital markets as it could prove a primary catalyst for outflows.
He added that government-led efforts to address the fiscal deficit often came at the expense of economic stimulus.
“The Malaysian prime minister (Tun Dr Mahathir Mohamad) made debt reduction the top priority after coming to power but at what expense to the economy (it remains to be seen) after shelving numerous infrastructure spends,” he told The Malaysian Reserve (TMR).
“I think this has more to do with appeasing debt rating agencies, knowing that their affirmation would ensure bonds remain attractive. Still, capital outflows continue.”
Investors are famously known for being adverse to regime change, but generally, acclimatise once uncertainties surrounding new governments or policies clear up.
Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said political dynamics cannot be isolated from financial markets as politicians effectively decide on resource utilisation which is currently very limited.
“In that sense, the clarity of policy direction will be closely watched. As we all know, the country has never seen a major change in the government at the federal level, so that creates anxiety among foreign investors,” he told TMR.
He said the current government is committed to plugging wastage while combating corruption to ensure economic resources are put into good use.
“The government has consistently acknowledged that they will remain mindful in their spending programme. Therefore, investors will continue to scrutinise government finances more closely.”
A Deteriorating External Picture
The fact that the tides of fortune have not favoured Pakatan Harapan has caused investors to flock to safe-haven assets or adopt a wait-and-see approach at the expense of risk-based markets.
Due to continuing domestic uncertainty and ongoing debt obligations, Malaysia was among the worst hit in the emerging market (EM) world.
Innes said external, as opposed to internal factors, exercised greater influence on Malaysian capital markets, fuelled by a stronger US dollar direction and global investors’ preference for US market exceptionalism.
He added that the rapid pick-up of China’s A-share market (stocks that trade on both of mainland China’s two exchanges) saw investors turning to Chinese equity for better gains.
“China, with the shift in the A-share weightings, was a magnet for local EM investors who sought more explosive gains in China,” he said.
Growing prospects of a US-China trade resolution initially provided the much-needed lift for local capital markets as Malaysia has high trade exposures to both countries.
US President Donald Trump, true to form, re-antagonised ongoing trade talks between Washington and Beijing earlier this week, again putting at risk major global trade flows.
The dissemination of information today, which continues to reach greater heights in terms of reach and speed, further sees investors reacting to global headlines and developments in an instant.
“Financial markets are very fluid and efficient, especially when the speed of information has become so enormous,” Mohd Afzanizam said.
“This could explain the volatility in the markets as investors will assess and revise their trade ideas almost constantly.”
He added that Malaysia’s high foreign ownership of equities and bonds result in these decisions (long or short Malaysian assets) being felt virtually instantly.
Prospects that FTSE Russel could drop Malaysian bonds from its World Government Bond Index and the sovereign wealth fund of Norway possibly exiting Malaysia’s fixed — income market further puts billions of ringgit of bonds at risk of outflow.
“In short, it’s going to be a tough year ahead for us,” Mohd Afzanizam said.
What Can the Malaysian Govt Do?
All hope is not lost for Malaysia as support from local institutional investors typically bolster the country’s capital markets during periods of the downturn, while monetary accommodation can be deployed to support the domestic economy.
“Capital outflows have continued, but this gap was easily bridged by local life insurance and pension fund demand,” Innes said.
“This suggests there remain deep pockets of local interest that will continue to support bond markets.”
The government may thus turn to its government-linked investment companies such as Khazanah Nasional Bhd and Retirement Fund Inc to provide those “deep pockets” of local demand which would offset the sell-off from both retail and foreign investors.
The Employees Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) are the other institutional investors who will continue to support local markets, but their obligation is to their contributors — not the federal government.
Amid a trying time for Malaysia’s capital markets, Mohd Afzanizam said the government resolve to prescribe stabilisation policies in the face of such adversities is what matters most.
The resurrection of the previously suspended multi-billion East Coast Rail Link (ECRL) and Bandar Malaysia developments could prove to be the catalyst markets that investors have been waiting for.
“Thus far, the revival of the ECRL and Bandar Malaysia projects could be deemed as fiscal pump priming as there will be an immediate impact to the economy once the projects hit the ground,” he said.
“The other is the monetary policy that was administered by Bank Negara Malaysia (which lowered the Overnight Policy Rate to 3% this week).”
Malaysia’s central bank opted to cut the key interest rate to manage the domestic economy amid a cauldron of external headwinds that threaten to boil over at any moment.
The monetary accommodativeness adopted by the central bank is a definite boon to domestic consumption, but it remains to be seen if this will translate into better economic growth.
After all, Malaysia regaining its position as an Asian financial tiger is contingent on the world’s willingness to listen to it roar.