Malaysia must brace for short-term pain

  • Markets
  • Monday, 11 Jun 2018

PETALING JAYA: The long-term outlook of Malaysia has improved significantly with a new government committed to a much better Malaysia.

However in the short term, uncertainty remains until the new government’s programmes and policies are clearer.

Value Partners Group co-founder and chairman Datuk Seri Cheah Cheng Hye felt that the initiatives of the new government have earned Malaysia tremendous goodwill from foreign investors.

But he does not expect to see foreign investors rushing to buy Malaysian stocks.

“I think foreign investors are actively exploring investment opportunities. But generally there is still a wait-and-see attitude and an air of uncertainty over how the new government will go about its programme of improvements,” Cheah told StarBiz.

He said the concern of investors is that the government would face difficulty in filling in the gap in revenue caused by the zerorisation of the goods and services tax on a long-term basis.

“I don’t see significant upside for Malaysian stocks this year. The market will be volatile and stocks don’t look particularly attractive.

“Foreign investors also need to regain confidence in the value of the ringgit,” said Cheah, who helps oversees some US$17.9bil under Value Partners.

The FBM KLCI was down 1.25% on a year-to-date basis to 1,774.41 on Friday.

As of last week, Malaysian equities experienced the fifth week of foreign selling, the longest selling binge recorded so far this year.

For the month of May, foreigners withdrew RM5.6bil net, the highest monthly outflow in 2018 thus far. Meanwhile, the year-to-date outflow from Malaysia is RM2.12bil.

David Gaud, the Asia chief investment officer of the US$220bil Pictet Wealth Management has been buying Malaysian stocks after Pakatan Harapan’s unprecendented election win last month, even though foreigners dumped them for five straight weeks.

He is bullish about Malaysia because of higher oil prices, a recovering currency and a quickly narrowing deficit.

“Prime Minister Tun Dr Mahathir Mohamad is lucky. He is able to implement a new policy at a time when the economy is recovering. He’s got a chance to succeed,” said Gaud.

Ang Kok Heng, chief investment officer at Phillip Capital Management Sdn Bhd said what he saw recently was a stronger ringgit and foreign funds pulling out of emerging markets.

“The May sell-down by foreign funds are related to the zerorisation of GST that may cause the budget deficit to worsen. The hidden Government loans under guarantees and financial leases also remind foreign investors of the government’s gearing. The everyday net sellers reflect that,” he said.

The government has announced that it would be able to maintain its fiscal discipline despite not implementing the GST that was supposed to contribute RM42bil to the Federal Government coffers. The revenue shortfall due to the zerorisation of the GST for this year is estimated at RM21bil.

Last week, Finance Minister Lim Guan Eng said the shortfall of RM21bil would be covered by a cut in expenditure, increased dividends from government linked companies and collection of sales and service tax.

Lim has said that the Federal Government budget deficit would remain at 2.8% of the economy.

Ang said that the market was in better shape under the new Pakatan Harapan government than the old government and noted that the local funds were supporting the market.

“I think our market is definitely in better shape under the new government than under the old government. So over the long term, the market will be positive. Over the short term, we need to wait for the Pakatan Government to show results from the reforms,” Ang said

Cheah, who started as a journalist with The Star in the 1970s in Penang and went on to become a successful fund manager in Hong Kong, had previously said that Malaysia has huge potential and opportunities but it needs structural reforms.

On the new government, Cheah said that Malaysia’s leaders are not magicians.

They need time, unity and some luck to overcome the many problems that have piled up in the country, he added.

“The challenges include a legacy of corrupt practices, a rapid increase in government debt and structural inefficiencies as well as social issues in the country,” he said.

In the past, Cheah has also been open about his views on the brain drain issue in Malaysia and how Malaysia has fallen behind in the competitiveness ranking.

He felts this needed to be addressed now.

“The big risk for the economy is that it remains stuck in a middle-income trap, especially if solutions cannot be found to the longstanding problems of a brain drain and capital flight. An estimated two million Malaysians now live overseas,” he said.

On top of that, the Malaysian stock market is not particularly cheap, trading at a price earnings ratio of 16, which is slightly above its historical average, said Cheah.

Nonetheless it is not all bad news, as there are positive factors too. For instance, the economy is projected to grow at around 4.5% this year, which is a healthy rate, although it is down from 4.9% last year. Exports are also growing nicely, helped by higher oil prices.

“Most importantly, the change of government has given new hope to people both within and outside the country. We only need to get a few important things right, and investors will find their way here,” said Cheah.

Cheah hopes that the leaders of Pakatan Harapan realise that winning the election – even though it’s a stunning achievement – is only the first step in a long journey to rebuild Malaysia.

“It won’t be easy and investors know this – that’s why many prefer to wait and see. The real test may come by next year when Pakatan’s honeymoon period is over. At that time, the financial markets will start asking difficult questions,” he said.

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