Malaysia’s hung parliament keeps market outlook uncertain

Malaysia saw its first-ever hung parliament in Saturday’s election after none of the three major coalitions won enough seats to form a majority, extending the political crisis in an economy on a fragile rebound.

While uncertainty remains, investors are expected to take the results in their stride as most have factored in a hung parliament as a “default position,” according to analysts.

The ringgit dropped by 0.60% against the dollar to 4.5837 following the election results, with the Malaysian currency the worst performer in Asia on Monday. Malaysia 10-year yields are steady at 4.32% while the nation’s equity benchmark dropped as much as 1.5%. Most of Malaysia’s gaming and alcohol-related stocks drop following the Islamic party PAS’ advance in the elections.

Malaysian party leaders have until Monday afternoon to inform the nation’s monarch of their choice for prime minister and the alliances they have formed.

Veteran opposition leader Anwar Ibrahim’s reformist coalition won 82 parliamentary seats in the elections, the biggest haul among the competing blocs. Meanwhile, former prime minister Muhyiddin Yassin said he has enough support to make a bid for the premiership.

Here is what analysts and money managers have to say:

Megat Fais, a strategist at Citigroup Inc.

“A lack of strong majority government remains less than ideal from a policy-making standpoint, especially with concerns over Malaysia’s fiscal position.”

A Yassin-led coalition government can put more scrutiny on gaming, brewery and tobacco shares while “apolitical” sectors such as planters and glovemakers could be seen as places to hide. Investors could remain wary of construction-related stocks, given the sector’s dependence on policy implementation.

“In the event of a sell-off by foreign investors, banks (eg. Public Bank) could be negatively impacted given the strong foreign inflows YTD.”

Alexander Chia, an analyst at RHB

“This outcome constitutes a worst-case scenario for markets, with investor sentiment likely to remain clouded when markets reopen – depending on the duration of the power vacuum, the quality of the Cabinet members, and the parliamentary majority of the eventual government that will determine its ability to institute reform.”

“The strong electoral performance by the PN coalition was a surprise and we expect regulatory risks to spike higher especially for the gaming, brewery and tobacco sectors.”
Stephen Innes, managing partner at SPI Asset Management

A smorgasbord of political choices favored a hung government, a default position for most market participants. From the market’s perspective, the results may fail to ease concerns over the recent phase of political instability, which has been hanging like a dark cloud over Malaysian capital markets.

Still, there will be no earthquake reaction like the one we saw post-2018 election, and given the hung parliament was a consensus, I suspect the market will take the result in its stride as the political landscape is unlikely to change too much from the present murky situation.

More importantly, investors are shrugging off the hawkish US Federal Reserve and still peering down the China reopening-looking lens, which should be favorable for the local capital markets.
Danny Wong, chief executive officer of Areca Capital

Once the new government is formed and this political uncertainty can be removed, markets will not react that drastically. This will reduce uncertainty in the short term, say one year. Beyond that, one needs to play by ear.

We like banks due to the rising interest rates and potentially the new government’s focus on reviving the economy. Avoid government-linked companies and commodities.

Nirgunan Tiruchelvam, analyst at Aletheia Capital

The initial reaction from the market will be a muted one, where there will be a risk of approach to investing in Malaysia. A hung parliament could lead to a lot of horse-trading but once the shape of a coalition becomes clearer, market sentiment could change dramatically toward Malaysia.

Still, the fundamental investment thesis toward Malaysia is quite clear, irrespective of the coalition. There are three sectors to focus on, which include commodities, as Malaysia is a leading producer of rubber, palm oil, and tin.

Next year could also be the year of Southeast Asian travel and companies that are exposed to travel and tourism could see strong investments. Consumer companies like food and beverage producers that are able to ride the recovery as people go back to normal activity could also do very well.
Win Thin, global head of currency strategy at Brown Brothers Harriman & Co.

Ringgit “may underperform within EM until some clarity is seen.”

In terms of coalition government, veteran opposition leader Anwar Ibrahim is well regarded by investors but his attempts to forge an alliance “may be held hostage by some of the smaller parties.”
Malaysia Latest: Anwar Confident He Will Have a Chance to Lead
Winson Phoon, head of fixed income research at Maybank Securities:

Parties can still negotiate to form a functioning government, but don’t expect frictionless working relationships.

This is not a surprise outcome to the bond market and a hung parliament has been a baseline scenario for many investors. We expect a bond-neutral reaction as market will likely take a wait-and-see approach pending clarity on the new government and key appointments. – BLOOMBERG


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