Last chance saloon for Anwar and PH

 

After years of political instability, will the promise of Malaysia Baru now have its day? (JPN pic)

PETALING JAYA: Given a second chance to govern Malaysia, Pakatan Harapan (PH) is unlikely to repeat the same mistakes that plagued its first tenure, especially with its leader, Anwar Ibrahim, now firmly in charge as prime minister.

In its latest research note, Fundamental Flash, to its clients, AHAM Capital (formerly known as Affin Hwang Asset Management Bhd) unpacks what lies ahead for Malaysia with greater clarity emerging on the political front and investment opportunities.

Here are excerpts from its report:

Once bitten, twice shy

When PH came to power in 2018 under 7th prime minister Dr Mahathir Mohamad, markets drifted lower as the government then embarked on a swathe of policy reforms that also grounded the wheels of commerce and eroded market confidence.

Backward-looking policies, including cancellation of infrastructure projects like MRT3 as well as wholesale changes of CEOs heading corporates or government-linked companies (GLC) impeded decision-making and stalled growth.

Other populist moves to abolish the goods and services tax (GST) which resulted in a RM40 billion revenue shortfall as well as broadband price cuts also decimated markets.

With a second shot at power, PH is unlikely to repeat the same mistakes and policy flip-flops that plagued its first tenure especially with Anwar now firmly holding the reins.

Channel checks with party officials also reveal an acknowledgement of the need to be more practical and nuanced in setting policy direction as well as communicating them.

All eyes on Cabinet

Strange bedfellows currently make up the unity government with Barisan Nasional (BN) and PH component parties, once at odds with each other, now finding themselves sitting on the same side of the Dewan Rakyat.

It is hoped that the new unity government, which effectively commands a two-thirds majority in Parliament, would be able to close ranks and restore political stability to carry out much needed fiscal and institutional reforms to attract foreign interest and invigorate the economy.

These include broadening the country’s revenue tax base and rationalising a ballooning subsidy bill that is projected to hit RM80 billion this year.

If these reforms can be effectively carried out, we could see a reversal of foreign fund flows and help revitalise the local equity market.

The unity government has yet to be unveiled. Expectations are we would see a much leaner Cabinet comprising a mix of technocrats and politicians that would help drive economic policies.

It will be important to monitor key Cabinet roles such as finance which could set the policy tone for other ministries.

Technicals are favourable

Mired by political instability, the local market has been stuck in the doldrums for the past few years.

Since 2014 to date, when 1MDB issues started hitting the market, the local equity market fell by over 18% in ringgit terms or 40% in US dollar terms, as US$15.9 billion (RM70.7 billion) worth of portfolio monies flowed out.

Foreign shareholding reached a 10-year low as political uncertainty dissuaded foreign investors from ploughing money. Domestic institutional funds have also been highly cashed-up as they sit on the sidelines.

Crucially, if there is a return of political stability and a growth story, foreign inflow could drive our markets higher. In every year between 2010 and 2021, whenever there is net foreign buying, our market has been driven positively higher.

With emerging clarity and successful execution of policies, we expect the local market to gradually ascend higher as it climbs over walls of worry in the political sphere.

The first obstacle is when Anwar tests his parliamentary majority through a vote of confidence on Dec 19 when Parliament convenes.

With low positioning and foreign funds underweighting Malaysia, we could see as much as RM10 billion in terms of foreign inflows, should foreign investors neutralise their benchmark-weights in Malaysia as confidence grows with greater clarity.

It is still early-stage but Malaysia could emerge as a prime growth destination for reinvestment and political stability in the region after being out of the radar for so long.

We have seen a strong appetite for Malaysia as evidenced by the sharp gains seen in the local market when Anwar was appointed as prime minister which ended the political impasse.

The rally was broad-based across sectors and driven by both domestic and foreign inflows suggesting investors are willing to relook at Malaysia for opportunities.

Portfolio positioning

Incremental positives domestically as well as in the macro environment with tentative signs showing US inflation peaking could signal an inflection point for Malaysian equities as the Fed tones down its hawkish rhetoric.

A renewed zeal to carry out reforms and avoid repeating the same mistakes also augurs well for the unity government as it finds its footing.

While recognising there is a timing trade-off between waiting for more clarity but also potentially missing out on gains, we find the balance of risks tilted towards the upside.

We are taking a selective approach towards building exposure through large caps in particular:

• Banks which continue to offer attractive dividend yields;
• Property stocks as a potential investment cycle play;
• Healthcare names given potential doubling of budget spending here;
• Beneficiaries of labour shortage restructuring;
• Beneficiaries of ringgit strength and subsidy restructuring; and
• Reopening-plays as more cross-border restrictions are lifted.

- FMT