Election a short-term market sway phenomenon
THE consensus is for the Barisan Nasional to win the upcoming general election (GE) to be held next Wednesday. But what if Pakatan Harapan were to win?
The immediate implications of a Pakatan win will be on the financial markets. The other implication is the impact in the mid to long-term of a Pakatan win on the economy.
The financial markets
There is no precedence for a win by the parliamentary Opposition in Malaysian history, and because investors prefer certainty, the financial markets are sure to be volatile.
The reaction of investors following the past two GEs is example of how investors value certainty and how Bursa Malaysia will be affected in the event of a Pakatan victory this time around.
The local bourse’s benchmark, the FBM KLCI, slipped 9.5% on the first day of trading after the 2008 election, which was held on a Saturday. This was after Barisan lost its two-thirds majority in Parliament for the first time and also lost control of five state legislatures.
In 2013, the stock market fell the week before the election on speculation of an Opposition victory at the federal level. That was the year when many felt sure that Barisan would lose. The Barisan clung on to power but lost the popular vote. The stock market rallied.
While there certainly was a reaction by investors, it must be noted that the Malaysian financial markets, including the stock market, do not act in isolation.
In 2008, fund flows were also influenced by broader movements in the global markets made volatile by the global financial crisis.
“Don’t forget that news flow from the US markets was bad on a daily basis,” a fund manager with an emerging-market portfolio points out.
Shortly after the 2008 election, Bear Stearns Companies Inc, an investment bank, was taken over by another investment bank, JPMorgan Chase & Co, in an operation largely directed by the US Federal Reserve (Fed), which was afraid of what the failure of a Wall Street institution would do to market confidence.
The fund manager tells StarBizWeek that investors just took the opportunity to offload riskier emerging-market assets following the outcome of the election.
“It’s normal to point to market swings either way to domestic factors but in reality, for the index to move, institutional shareholders must react and they rarely do so on just domestic factors, especially in that period of time,” he says.
The same reasoning goes for currency movements. The ringgit’s weakness in the past month has been blamed on investor jitters prior to the upcoming election, but pressure on the currency is really coming from rising US bond yields.
Investors are repositioning on market speculation of four instead of three US interest rate hikes and this has had an impact on emerging-market currencies as well as equity markets.
Although the Fed left the benchmark interest rate unchanged in a recent meeting, officials say that inflation is close to the 2% target. The market expects the Fed to raise the federal funds rate a second time in June when it next meets.
How this works is that investors are anticipating that new US government bonds will now be issued with a higher coupon rate, which is the interest that is paid out annually on the bonds because of the higher interest rates. Also, because of the anticipation, the earlier issued bonds, with a lower coupon rate, will now be traded at a lower price, and because there is an inverse relationship between bond prices and yields, there is a rise in bond yields.
This is why the benchmark 10year US Treasuries yield is now higher, because the price has dropped, causing US bond yields to narrow against the yields of similar-tenor bonds of foreign government issuers.
For example, the yields between the 10-year Malaysian Government Securities and the 10-year Treasuries have narrowed, making Treasuries – because of its safe-haven status and underlying currency strength – a more attractive asset.
An interest rate hike also means that inflationary pressure is picking up because of economic growth and that will attract investors too.
The steady US economic outlook, US dollar strength and safe-haven status at a time of much geopolitical uncertainty are also attractive factors. Currency strategists point to US dollar movements as more important when taking into account the US dollar/ ringgit pairing. The decisions of US policymakers as well as other external factors such as trade will have more weight on the ringgit’s direction rather than purely domestic factors.
Even the rising oil price has not been able to stem the weakness in the ringgit, and that is because of the investors repositioning rather than any inherent political risks.
However, a political analyst did say that without the higher oil price, the ringgit could have seen a steeper fall. “It could be that rising US bond yields is the reason for the ringgit’s weakness but I believe that political factors are at play too and that without the higher oil price, the ringgit would have fallen even more,” he says.
The economy
A Pakatan government will have to find a middle path in unravelling some of the more unpopular policies, while ensuring policy continuity and assuaging the concerns of investors.
Both Barisan and Pakatan claim to have the people’s welfare at heart, and both claim they want to alleviate the cost-of-living issue that Malaysians have been grappling with in recent years. The Pakatan coalition is also calling for the shaping of the nation’s economy in a fair and just manner.
The Pakatan promises must take into account the urgent need for the economy to move up the value chain. In one respect, a focus on high-end manufacturing will have a positive spillover effect, as such initiatives will attract high-end service jobs including banking and financial services as well as research and development opportunities.
The Pakatan manifesto launched in early March includes 10 promises to be implemented within 100 days of winning the election. Among the promises are the abolishment of the goods and services tax, reintroducing the petrol subsidy and increasing the minimum wage to RM1,500 by their first term in office.
Moody’s Investor Service analysts say in a report released yesterday that the implications on the country’s credit standing will be determined by the impact of the election results on existing government policies, with particular regard to fiscal consolidation and debt trend.
“Ahead of the election, Barisan and the key opposition, Pakatan, have both unveiled their manifestos and specific spending programmes targeted at key voter bases. These measures include raising the minimum wage, greater cash handouts and relief for Federal Land Development Authority settlers, among others,” they say.
The rating agency, which has maintained the country’s A3 credit profile with a “stable” outlook, says the impact of these programmes on the sovereign credit will depend on how they are funded and whether they have a negative effect by delaying the government’s ongoing efforts at fiscal consolidation.
“Economically, these programmes are likely to boost consumption over the near term but against the backdrop of Malaysia’s export-driven growth, the impact is not likely to be material and could be offset by inflation,” they note.
Another crucial promise is to launch detailed studies of multi-billion-ringgit projects awarded to foreign countries. This particular promise is likely aimed at China, which has become a major investor, if not the largest in recent years, with not only infrastructure projects but also property development.
Pakatan will have to tread carefully where reviewing contracts is concerned, as the sanctity of contracts is crucial to investor confidence.
“Any review of the mega-projects will have to be done in a tactful manner. Malaysia is not the United States, we don’t have the heft, so we need to be careful,” an analyst says.
It’s normal to point to market swings either way to domestic factors but in reality, for the index to move, institutional shareholders must react and they rarely do so on just domestic factors, especially in that period of time. Fund manager