‘Absence of political overhang reduce risks’

‘“The interest- rate differential between the US and Malaysia remains wide at 125 basis points. Any further hike in policy rates, normalising rates to the 3.50 per cent level, could be positive.

“Unlike Malaysia, most of its peers have a lower interest-rate differential that insufficiently compensates for additional risk while also facing weaker economic fundamentals,” the research team said.

Aside from that, the absence of a political overhang reduces risk of uncertainties, Affin Hwang pointed out.

“Ultimately, investors were adverse to uncertainty and we witnessed a period of heightened market volatility – both Thailand and Indonesia – in the immediate period post these events.

“Likewise for Malaysia, the KLCI suffered some volatility due to policy changes following the change in government. However, notably losses on the KLCI were further exacerbated by a selldown in EM and global markets as fears over a US-China trade trade war intensified,” it added.

“On the whole, we nevertheless remain mid to longer term positive and believe that the on-going reforms coupled with a more-transparent government with the right policies will steer the country in the right direction and help with a valuation re-rating.

“In our view, if individual-company corporate-governance reforms can have a positive market impact on a company’s valuations, we believe the same can be said for market valuations through the political, legal and economic reforms that the government is undertaking.

“We are confident that economic growth could receive a boost longer term while the positive changes could overall lead to an improvement in the investment climate,” Affin Hwang opined.

Meanwhile, MIDF Research said, the trend of outflows might feature in the short to medium term considering concerns over recession hitting the US in the coming year or two coupled with lofty valuations of developed markets and its hawkish and protectionist stances.

“And of course from the uncertainties on the domestic front as the new government settles down and works through its plan. We need to give time as changes cannot happen overnight especially the ones that involve existing laws which entails a complex procedure.

“The government has the right to relook at mega projects and determine its profitability to have the costs reviewed. But certainly it has negatively impacted the construction sector but nonetheless should not derail interest of foreign investors.

“The focus on improving corporate governance and are actually big pluses to entice foreign investors which is further enhanced by the government’s stance in ensuring a good relationship with foreign investors,” MIDF Research commented.

All in, the research team pointed out that external developments play a huge role in Malaysia’s markets.

“While we are waiting for the dust to settle as far as the government policies and actions are concerned, we should not forget the headwinds from the geopolitical events which is not just affecting the local market but also neighbouring countries and even developed nations.

“Hence we expect markets to be a bit quiet in the next few months as its trading value has already hit a record high twice in May, such as trading value of RM7.3 billion May 14 (first day after market open after GE14) and trading value of RM9.3 billion on May 31 (date of MSCI rebalancing).