THE NAJIB DISCOUNT – MALAYSIAN MARKETS LAG: EXPENSIVE HANDSHAKE WITH ANTI-ISLAM TRUMP & MEGA DEALS TO ‘STRENGTHEN’ U.S. ECONOMY JANGLE MALAYSIA INVESTORS

Malaysian stocks continued as Asian laggards after a 16% gain through mid-September in US dollar terms on the MSCI Index, half the Asian emerging-market average, with Prime Minister Najib Razak’s highly publicized White House visit with President Donald Trump raising fresh doubts about future diplomatic and economic-policy leanings.

Supporters of Najib’s ruling United Malays National Organization hailed Washington’s embrace as overdue “normalization”, pushing US Justice Department corruption and money-laundering investigations of 1Malaysia Development Berhad (1MDB) into the background, and as a rejoinder to opposition allegations that China’s large FDI (foreign direct investment) footprint was “colonizing” Malaysia.

Malaysian Transport Minister Liow Tiong Lai noted around the time of Najib’s trip that China remained behind the US, Japan and members of the Association of Southeast Asian Nations in the FDI sweepstakes, although the Chinese ambassador to Malaysia claimed it was No 1 this year, with a US$3.5 billion total in the first half, after 30 billion ringgit ($7 billion) in deals were inked in May and the 55 billion ringgit high-speed East Coast Rail Link broke ground in August.

However, the Malaysian delegation walked away without big-ticket US projects, as it dipped into the country’s coffers to finalize 25 Boeing aircraft purchases for $10 billion and allocate $5 billion to New York-listed stocks through state-owned pension pools.

The main Employees Provident Fund, with 750 billion ringgit in assets, at the same time announced a one-third jump in second-quarter income, attributed to local securities and other developing-market performance ahead of S&P 500 gains.

Rural voters, key to the outcome of the next elections to be called by 2018, were losing faith in the prime minister according to opinion surveys, and also hold Trump in low regard for alleged anti-Muslim sentiment and legislation. They also cite fewer benefits than urban dwellers from the government’s spending binge, up 20% in the first half to fuel 5% economic growth alongside the federal debt amounting to 55% of gross domestic product.

Second-quarter GDP growth was ahead almost 6% from the corresponding 2016 period on good private consumption, but public infrastructure outlays were the chief driver, swelling the fiscal deficit to 5% against the 3%-of-GDP target. Headline inflation fell to 3% in recent months, the same level as the benchmark policy interest rate the central bank kept at its September meeting.

The ringgit could appreciate to 4 per dollar as both current- and capital-account numbers strengthened through July. Exports and imports rose 20% and total trade passed the 1 trillion ringgit mark, as the global tech and manufacturing cycles rebounded and agricultural commodity prices firmed.

Portfolio outflows reversed in the second quarter to an inflow of more than $3.5 billion, according to Central Bank of Malaysia figures, enabling an overall balance-of-payments surplus.

Foreign ownership of local-government bonds dipped to a more manageable portion than the previous 50% peak after officials imposed limits on offshore derivatives while allowing short sales. The global sukuk market, half controlled by Malaysia as the biggest player, sustained its double-digit growth through the first half and reached $375 billion in Islamic instruments outstanding by Kuala Lumpur-based International Financial Center statistics.

Former prime minister Mahathir Mohamad, who in his 90s has set up a new political group to challenge former protégé Najib, was instrumental in the Islamic-finance push, but central bank currency transactions during his tenure are now the subject of a dedicated parliamentary inquiry also due to call longtime opposition leader Anwar Ibrahim, who served as finance minister two decades ago. Twenty witnesses have so far appeared to shed light on purported hidden losses, but public opinion has viewed the proceedings largely as a government vendetta against its predecessors.

The “Najib discount” may be readily applied in a comparison with stocks in adjacent Singapore, advancing 20% through mid-September on sputtering 2-3% GDP growth. Electronics and engineering exports leapt 8%, but domestic demand is still weak with construction in outright contraction.

Private consumption in Singapore was flat, and with a new president of Malay background the government has advocated education, training and automation improvements to productivity to lift future output.

Retail-business closings were up 20% in each of the past two years, and Singapore’s banks are bracing for further deterioration in the hydrocarbons sector in particular that will raise the 1.5% average bad-loan ratio.

According to the Monetary Authority the exchange-rate-based “neutral” stance remains appropriate, as big property developers like CapitaLand and City Developments call a residential-market bottom after 15 consecutive quarterly home-price drops that have scandalized both middle-class and high-end owners.

– http://www.atimes.com