Market to potentially see near-term shock, but long-term positive

KOTA KINABALU: The change in Malaysia’s government could be viewed negatively from a market perspective due to the policy uncertainties the new government presents but analysts believe that this reaction could only be temporary.

Malaysia’s market, which is expected to open today, could view this changes negatively, said Affin Hwang Investment Bank Bhd’s research arm (Affin Hwang) in a report.

It pointed out that the removal of the GST with its absence of an estimated RM43.8 billionn (in 2018) from the government coffers could be the likely trigger for a sovereign-rating downgrade by international agencies.

It added, a sovereign-rating downgrade from the current investment grade status is likely to result in a sell-down of the MGS (10-year MGS at 4.156 per cent at May 8), and dampen the ringgit while resulting in a steeper yield curve and hence higher overall borrowing costs for the country.

It also highlighted capital flights are possible over near term.

It said: “With the market uncertainty, the potential for major capital outflows from both the bond and equity markets is possible in the immediate term. Foreign ownership in the equity market stood near a five-year high at 24.1 per cent in April 2018.

“Likewise, foreigners own a substantial stake in the bond market (45.6 per cent holding in the MGS), which could result in massive capital outflows over the near term.”

Nevertheless, Affin Hwang said it remained confident in Pakatan Harapan’s (PH) direction and policies.

It commented, “We are, however, of the view that PH’s plan for fiscal reforms in its first 100 days in office should address much of the market’s concern.

“Importantly, the impact from the GST removal should be negated by higher oil prices, the reintroduction of a Sales and Services tax (SST) and better management of the government’s operating expenditures.

“With a revamped PH cabinet potentially comprised of seasoned ex-ministers, we are confident that the economy will remain in safe hands.”

Any weakness in the ringgit is also expected to be short term as it believed that the ringgit should appreciate to the RM3.80 per US dollar level by year-end given the strong fundamentals of the currency (undervalued based on real effective exchange rate while required conversion by exporters should drive demand for the ringgit).

“In short, while there may be some near-term shocks to the ringgit - one of the best-performing currencies in the region year to date – we are sticking to our year-end RM3.80 per US dollar assumption as we believe that fundamentals are intact,” it added.