ON Sunday (Aug 15), local news agencies reported that Malaysian Prime Minister (PM) Tan Sri Muhyiddin Yassin could resign on the next day (Aug 16).
Given the lack of a clear majority in Parliament, it was unclear who could form the next administration or whether elections could be held during the pandemic.
What happens next would probably be decided by the Yang di-Pertuan Agong who has the constitutional power to appoint a new PM from among elected lawmakers (similar to February-March 2020 when Muhyiddin was appointed).
In the meantime, Malaysian investors should brace themselves for any eventuality, given the latest political turmoil could send jitters across Malaysian markets.
The latest development has thrown a spanner in the works for the recovery of Malaysia’s equity market (which has been one of the worst performing markets this year with -7.50% YTD return).
Likely a less severe impact
To gauge the potential reaction this time round, we revisited the market movements during the events of the 2020 Sheraton Move in late February to early March 2020, which led to the fall of the Pakatan Harapan Government and the appointment of Muhyiddin Yassin as Malaysia’s eighth PM.
The biggest one-day loss for the FBM KLCI was -2.69% which happened on Feb 24, 2020 when a series of groundbreaking events occurred – the then PM Tun Dr Mahathir Mohamad resigned, the Cabinet was dissolved and Pakatan Harapan lost its majority in the parliament after a group of MPs withdrew from the coalition.
Subsequently, the benchmark index traded sideways until the confirmation of a new PM.
Although we still expect a negative impact on markets, we think that the impact this time around will likely be less severe than that of last year’s as it may not come as too big of a surprise to many.
In comparison, the events that unfolded during the Sheraton Move were a much bigger shock to markets compared to this round.
Moreover, we believe that a lot of negativity has already been priced into markets as the FBM KLCI Index has been trading downwards since the start of the year with multiple political events unfolding throughout the year.
That said, we expect markets to continue to be choppy until the political scene stabilises, similar to what happened in 2020.
Foreign investors exiting Malaysia
In particular, the heightened political uncertainty has turned foreign investors away from Malaysia. Foreign investors have been net sellers of Malaysian equities for seven weeks in a row up to the week ended Aug 6.
Cumulatively, foreigners have pulled out a total of RM5.99 bil out of Malaysian equity markets, resulting in foreign ownership of Malaysian equities dropping to an all-time low of 20.2% of total market capitalisation as of end-July 2021.
Sell-off can be buying opportunity
Apart from the political turmoil, fundamentally there could be challenges for the pandemic-stricken Malaysian economy whereas equity valuations are fair at most amid lacklustre earnings growth. Hence, we continue to rate the Malaysian market “neutral” overall.
That being said, we think that there are still pockets of opportunity within the equity market and any sell-off triggered from the political turmoil could be an opportunity for investors to pick up sectors that we like.
Going forward, we opine that the banking sector which boasts a strong balance sheet are able to weather potential uncertainties and are attractively priced with a recovery in earnings expected over the next few years.
We also see more opportunities outside the large caps which is in the small caps segment that tend to have higher growth potential.
We like the bright prospect of the local technology sector as it is propelled by strong global demand for semiconductors. Meanwhile, the real estate investment trust (REIT) sector could be an undervalued recovery play as the country moves towards a reopening towards the end of the year. – Aug 16, 2021
iFAST Capital Sdn Bhd provides a comprehensive range of services such as assisting in dealing, investment administration, research support, IT services and backroom functions to financial planners.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
