The year when investors stop believing in magic


  • Markets
  • Saturday, 28 Dec 2019

Slow market: A file picture showing electronic boards with share prices of Bursa Malaysia. Even Hong Kong that sees rowdy protests has performed better than Bursa Malaysia. — AP

EXPECTATIONS were running high when the year started after the change in government in May 2018.

Many had thought that the new government would have settled down, the economy would start moving, money would flow into a more-accountable and transparent Malaysia and the stock market will wake up from the doldrums.

None of the above happened.

Topping the list of what did not happen is the unstable political period that Malaysia is entering due to the blurry picture on the leadership transition in Putrajaya. In 2018, it appeared that everything was quite clear – Prime Minister Tun Dr Mahathir Mohamad would hand over the leadership mantle to Datuk Seri Anwar Ibrahim next year.

But it is not as simple as that. Instead what is happening is the re-alignment in the support of the elected representatives sparking a series of possible “political mergers and acquisitions” (M&A).

Some 18 months ago, who would have thought that PKR deputy president Datuk Seri Mohamed Azmin Ali would have a fallout with party president Datuk Seri Anwar Ibrahim.

Who could have predicted that the DAP’s solid support from the Chinese would come under threat? M&As in the corporate world is good for the capital markets. It’s not healthy for a country to be plagued with political M&As. It erodes the confidence of investors.

The numbers are evidence enough to show that so far, the Pakatan Harapan government has failed to exude investor confidence.

Malaysia’s stock market is one of the worst performing ones in 2019. Even Hong Kong that sees rowdy protests every week and that has become a pawn in the US-China trade war performed better than Bursa Malaysia.

For the first nine months of this year, Malaysia’s approved investments came up to RM149bil, higher by 4.4% compared to the corresponding period in 2018. Foreign direct investment (FDI) was RM66.3bil while domestic direct investment (DDI) came up to RM82.7bil.

In 2018, total approved investments came up to RM201.7bil of which DDI was RM121.1bil while FDI was RM80.5bil.

The 2019 figures are likely to surpass the 2018 numbers. But the money is not gushing in as some expected. Instead, it is coming in slowly.

Investors have stopped believing in the magic of reforms coming overnight with the change in government. But they have not given up hope either. The money will flow back to Bursa Malaysia when investors see improvements in reforms and certainty in political leadership.

Investors have also stopped believing in the magic of the “tech unicorns”, which is the second surprise of the year.

Unicorns is a term coined in 2013 to describe technology companies with a valuation of more than US$1bil. There are more than 400 unicorns in the technology world. Among them are ride hailing companies Uber and Lyft which were listed this year.

Both the shares failed miserably, falling by a third from its initial public offering. The founders made their money. But late stage investors are facing paper losses.

The biggest flop was the aborted listing of WeWorks, the technology company that offered shared work spaces for short-term leases. WeWorks was supposed to join the list of listed Unicorns but instead is now in need of a rescue plan.

WeWorks’ valuation was supposed to be as high as US$48bil. However based on a rescue package anchored by SoftBank, which is its largest shareholder, WeWork is worth only US$8bil.

The failed listing of WeWorks sent shock waves to the tech world in the US market. But the proponents point out that Facebook and Amazon also did not do well in the first few years of their listings but are now among the most valuable companies in the United States.

The third surprise in the capital markets is the resilience of China and Hong Kong against the trade war with the United States. Amidst the trade war, there was weekly protests in Hong Kong against China’s influence over the former British colony.

China could easily over-power the protestors with its authoritarian rule. However, it cannot afford to do that because Chinese companies depend on Hong Kong for US dollar funding.

The financial centre is the only place where the yuan can easily be converted without many questions asked.

Anybody would have thought that with a slowing domestic economy, a trade war with mighty US and the problems in Hong Kong, the Chinese economy would have caved in. But to the surprise of many, it has shown resilience.

Away from China, the fourth surprise is the reversal in US interest rates that has sparked off other central banks following suit.

The Federal Reserve has had three cuts since July this year to bring down the interest rates to 1.5%-1.75%.

For now, there is unlikely to be any rate cuts for next year. But if the global economy were to slide further by another round of trade war, the cost of funds would come down.

The reversal in interest rates has made the investing climate more difficult, especially for pension funds that depend on risk-free fixed income markets for the bulk of their income.

Since 2009, the costs of risk-free fixed deposits with banks are low. In some European countries, banks charge their customers for keeping money in the financial institution.

A low interest-rate environment is unhealthy for a long period. It will force investors, in search of yields, to put money in risky assets. Such a trend would spell danger as asset valuation globally is at an all-time high.

The US markets have had a good run since 2009 and this year alone, the Dow Jones Industrial Average is up 27%. Normally stock markets correct once in about 10 years. Next year, the US market will enter its 11th year of bull-run.

The magic of a bullish stock market in the United States will stop, eventually.

Bursa Malaysia has had another bad run – its fifth over six years. One can say that the market has corrected. But if the US markets were to go into a correction mode, Malaysia would feel the impact. There is no doubting on that.

The views expressed are the writer’s own.

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