Malaysia’s once-thriving markets are facing turbulent times as a revolving door of leaders plunges the country into uncertainty. The frequent change in leadership has driven investors away, transforming Malaysian assets into some of the most unloved in the world.
This year, Malaysia’s benchmark equity gauge has performed poorly, making it one of the worst performers globally. Its downward slide towards a bear market is an abrupt reversal from its previous status as the world’s longest bull run. The country’s currency, the ringgit, is also suffering as it emerges as the biggest decliner among emerging Asian currencies in 2023.
Since 2018, Malaysia has witnessed four different administrations, leading to a loss of political stability-premium. These frequent changes have hindered growth and created conflicting agendas, while plans to rein in debt have fallen short. Now, Prime Minister Datuk Seri Anwar Ibrahim, who assumed power in November, faces the challenge of attracting foreign investments with market-friendly reforms, especially as demand from China, its largest trade partner, slows down.
Investors want to see what is the narrative of this new unity government, said Lee Heng Guie, executive director of the Socio Economic Research Centre. What are the companies that will uplift Malaysia? This will not come from the same traditional sectors, such as commodities.
Amidst this backdrop, global funds have withdrawn nearly a billion dollars from Malaysia’s stock market this year. The outflow of funds is part of a larger trend that started when the Barisan Nasional coalition, which had ruled the country for six decades, was overthrown in 2018 due to rising costs of living and corruption allegations.
Since then, the successive administrations have struggled to cope with the aftermath of abolishing the unpopular goods and services taxes, while also dealing with a fiscal deficit that ranks among the widest in Southeast Asia. A narrowing trade balance is adding to the challenges faced by companies burdened with high-interest rates, further weakening the currency.
Anwar, leading a coalition government, aims to cut state subsidies and broaden the tax base to reduce debt, while also making it easier for foreign companies to do business in Malaysia. In the first quarter, his administration approved foreign direct investments worth RM37 billion, a third higher than the previous year.
However, despite these efforts, Malaysia’s equity benchmark is down 7% this year, bringing it closer to a bear market territory. Brokerages have revised their targets downwards, and as per a JPMorgan Chase & Co report, around 50% of stocks under coverage failed to meet earnings expectations in the first quarter, while only 12% exceeded them.
Malaysia’s reliance on domestic institutional investments to support premium valuations has also dwindled in recent years, as these funds increasingly allocate money to overseas equities. At the same time, foreign investors struggle to find attractive growth opportunities in Malaysia, as the benchmark index mainly consists of old-economy stocks at a time when technology firms and artificial intelligence are gaining more attention globally. The index’s price-to-book ratio of 1.3 times is nearing its pandemic low and is significantly lower than the 10-year average.
Anwar was supposed to be a reformer, said Raymond Chan, chief investment officer for equity, Asia Pacific, at Allianz Global Investors. He emphasized the need for Anwar to market the story to foreign investors and suggested that the Malaysian stock exchange should attract tech listings while the government focuses on attracting more foreign investments.
The weakening Malaysian ringgit, which has declined more than 5% against the dollar this year, reflects the ongoing uncertainty surrounding the government. Additionally, the sluggish Chinese economy adds to the challenges faced by Malaysia.
Goldman Sachs Group Inc analysts have revised their forecast for the ringgit, predicting a further weakening to 4.7 against the dollar in the next six months. The weak currency undermines the attractiveness of the Malaysian market for foreign investors, according to Dionne Cheung, associate investment director, Asia ex-Japan equities at Schroders.
Nevertheless, Malaysia does have a foothold in the technology sector, with a burgeoning chip assembly and testing hub that has attracted investor interest. A JPMorgan analysis shows that 16% of funds under management tracked are invested in tech stocks, far exceeding their weighting.
However, in the near term, Anwar faces the same challenge as his predecessors – staying in power. Unfavorable results in upcoming state polls in August may pose a risk for the coalition government if its allies reassess their support.
A lot of this policy restructuring is expected to take place in the second half of 2023, said Yeah Kim Leng, professor of economics at the Sunway University Business School, who advises the finance ministry. He added that investors are waiting to see these reforms pick up pace before making significant moves.
As Malaysia navigates through these turbulent times, it is crucial for the government to restore investor confidence by implementing market-friendly reforms and attracting foreign investments. While the country’s traditional sectors may no longer be the key drivers of growth, the burgeoning technology industry and semiconductor sector offer promising prospects. However, political stability and effective governance will be essential in rebuilding Malaysia’s position as an attractive investment destination.
