Political twist adds to risks besieging Malaysian assets

(Sept 25): Investors faced with a pullback in Malaysian assets just got jolted by a political twist that spells turbulence ahead for one of Asia’s more resilient markets.

Opposition leader Anwar Ibrahim on Wednesday dropped a bombshell by claiming to have enough lawmaker support to form a government. Prime Minister Muhyiddin Yassin rejected the assertion, saying his administration remains firmly in control. The move raises the odds for early polls to settle months of political uncertainty, which could disrupt stimulus policies.

All this means a long volatile ride for investors. Malaysia’s markets had until recently fared relatively better than Asian peers in the wake of the pandemic, a resilience now being tested as coronavirus cases spike and political temperatures rise. Also looming is the end of six-month moratorium on loan repayments that lifted the country’s benchmark equity index from its March low.

“The latest development serves as a potential trigger for more noise for the market,” said Jingyi Pan, a strategist at IG Asia Pte. Still, “given what Malaysia had been through thus far, there had been a growing desensitization toward such power struggles,” he said.

The benchmark FTSE Bursa Malaysia KLCI Index has retreated 7% since hitting its year-to-date high on July 29, falling below its three key moving averages. The ringgit has weakened in September after capping a third month of gains as the dollar regained some traction.

FTSE Russell kept Malaysia on a watchlist for possible exclusion from its World Government Bond Index, a move that may keep the pressure on the central bank to continue delivering reforms to deepen onshore markets.

After Anwar’s move, Malaysia’s king is set to play a key role in what happens next. The monarch, known as the Yang di-Pertuan Agong, plans to hold an audience with Anwar soon to give him the opportunity to prove his assertion, after postponing a Tuesday meeting for health reasons. There’s no exact date set yet.

Political wrangling

“The political wrangling at the top means that longer-term economic policies are on the back-burner,”said Trinh Nguyen, a senior economist at Natixis SA in Hong Kong. Those polices are “sorely needed right now with Covid weakening growth sources and exposing Malaysia’s less diversified economy,” she said.

Malaysia could have fared worse, if not for the meteoric rise in rubber-glove makers. The KLCI is down 5.5% this year, compared with declines of more than 20% in Singapore, Thailand, Indonesia and the Philippines.

The collapse of former Prime Minister Mahathir Mohamad’s government in February took a toll on Malaysian stocks and helped end the world’s longest bull market run. Foreign selling in Malaysian stocks accelerated last week, with outflows topping $5 billion so far this year, the fastest pace since 2015, according to data compiled by Bloomberg.

“The latest twist in Malaysian politics is only adding further uncertainty, at a time when there are concerns about the global recovery due to rising infections in Europe,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. “If this current development is drawn out, investors may again head for the exit to wait it out, putting pressure on the currency.”

Source: TheEdgeMarkets