Business unusual in Malaysia
The political tsunami has stoked uncertainties, but reforms are expected to improve market sentiment.
The Malaysian voters booted out the previous government largely premised on one main agenda – system-wide reformation.
Pakatan harapan’s promise to enact economic, institutional and political reforms successfully led the coalition to an unprecedented victory in Ge14.
Indeed, the outcome of Ge14 has surprised most observers and research houses such as Nomura and RhB Research Institute, who had predicted Pakatan to lose.
Despite the expectation of a Barisan Nasional win, nervy investors had chosen to be on the sidelines and switched to defensive blue chip counters ahead of Ge14, driven by perceived domestic political risk.
The benchmark FBM Kuala Lumpur Composite Index (FBM KLCI), touted as the world’s longest bull market since 2008, began to decline after hitting a record-high on April 19 – barely a month before the election.
The 30-stock index continued to hit downtrend even after May 9, the Ge14 day.
however, it was the small-cap counters that were most battered in the run-up to Ge14, as investors sought haven in blue chips considering the uncertainties in the political scene then and the escalating global trade war concerns.
Between January 2 and May 8, the FBM Small Cap Index slumped by some 15%, bringing the index’s price-to-earnings ratio close to the average small-cap valuation since the 2009 Global Financial Crisis.
In comparison, in the same period a year earlier, the FBM Small Cap Index surged by nearly 19%. In fact, for the full-year 2017, the index overwhelmingly outperformed the FBM KLCI, continuing its handsome run in the prior two years.
Uncertainties shrouding Ge14, aside from the trade tension between the United States and China, also led to the net outflow of foreign funds from Malaysia.
In an earlier report, MIDF Research pointed out that foreign investors turned net sellers in the penultimate week before Ge14, withdrawing a net amount of RM438.4mil.
“In contrast, the penultimate week before the Ge13, foreign investors snapped up RM750.4mil net of local equities. Foreign attrition was only seen on the last trading day before Ge13 which only amounted to RM91.7mil net,” stated MIDF Research.
Actually, the jitteriness among investors and market players prior to Ge14 is understandable. After all, Malaysia has never seen such a tight political state of play at the federal level post-independence.
On top of that, Pakatan’s election promises such as the proposed abolition of the goods and services tax (GST) and the removal of toll charges nationwide, were criticised as populist by many as well as counterproductive to the country’s fiscal deficit target.
The buildup of such perception prior to the election has cast doubt on Pakatan’s victory and its potential to steer Malaysia towards effective macroeconomic management in the long run.
And then came May 9, the D-Day for Ge14.
The announcement on Pakatan gaining a simple majority came in the wee hours of May 10. The unexpected outcome of the election could have easily rattled the bourse, leading towards a sea of red in the stock exchange.
Fortunately, Prime Minister Tun Dr Mahathir Mohamad declared two consecutive days of national holiday on Thursday and Friday following Ge14, leaving ample time for the market to somewhat cool down.
In an immediate knee-jerk reaction, on May 10, the five-year credit default swap price, an indicator of cost to insure a Malaysia default, surged to an 11-month high in the United States. On the same day, the iShares MSCI Malaysia eTF, the biggest exchange-traded fund holding Malaysian stocks, fell by 6% - the lowest since December 2017.
On May 12, in an unexpected turn of events, Dr Mahathir announced the setting up of the Council of eminent Persons to help the Government shape national policies to fulfil Pakatan’s promises to the rakyat.
headed by Tun Daim Zainuddin, the council comprises Tan Sri Dr Zeti Akhtar Aziz, Tan Sri hassan Marican, Prof Jomo Kwame Sundaram and tycoon Robert Kuok.
The establishment of the council gave investors and market observers a stronger confidence of Pakatan’s ability to remain steadfast to resilient economic management over the next five years.
Bursa Malaysia reopened for trading on May 14, amid expectations of intense selling pressure.
early trade for the FBM KLCI was negative as the index lost almost 50 points after the opening. In fact, within the first five minutes of trade, the FBM KLCI fell by nearly 2.7% - the sharpest in 14 weeks.
however, underpinned buying support mostly from local funds, the benchmark index rebounded thereafter and ended the day 3.91 points or 0.21% higher at 1,850.42 points.
On May 16, the Finance Ministry announced that the GST would be set at 0% beginning June 1, 2018, in the Government’s first move to abolish the indirect tax regime completely.
“As such, all registered traders must follow the decision of the zero rate now. At the same time, registered businesses are still subjected to all current regulations,” said the ministry.
Removal of the GST was one of the key pledges by Pakatan within 100 days of coming to power. The consumption tax will be replaced by the sales and services tax (SST) from Sept 1 onwards.
While the abolition of GST is expected to result in a shortfall of RM23bil, the Government has said that it could be largely offset given higher crude oil price, revenue from the SST and the cost-cutting measures at the federal level.
“In other words, the projected fiscal deficit will increase from RM39.8bil to RM40.1bil, which would maintain the Federal Government budget deficit at 2.8% of the gross domestic product (GDP). In addition, the Government’s current balance (government revenue less operating expenditure) will also remain positive,” said newly-minted Finance Minister Lim Guan eng in an earlier statement.
Just as when most Malaysians were rejoicing the news on zerorised GST, the Government dropped a bombshell which spooked everyone, investors and ordinary people alike.