Welcome back from a long holiday, Malaysians.
The 93-year old, Malaysia’s longest-serving former prime minister, Tun Dr Mahathir Mohamad has successfully staged a stunning return to power after defeating Barisan National, ending its sixty years grip on power. In fact, after securing the victory in GE-14 against his political coalition, Tun Mahathir is poised to be the oldest prime minister in the world.
At the point of writing, Malaysia equity market as represented by FBMKLCI Index posted about -2% of intraday losses. As mentioned in the previous write-up, the plunge in the local equity market is unavoidable especially within the government-linked companies as the election result came in surprisingly for most of the market participants.
A Closer Look Into PH's Manifesto
Prior to GE-14, the opposition coalition, Pakatan Harapan
(PH) has unveiled their manifesto with the theme of “Rebuilding The Nation, Fulfilling Dreams”. The election manifesto includes 60 pledges which divided into 5 thrusts, mainly aiming to ease the cost of living for people, to reform the administrative and political institutions, to improve the fair and equitable economic growth, to restore the status of Sabah and Sarawak in accordance to Malaysia Agreement 1963 and to build Malaysia as a country that is inclusive, moderate and excellent at the global stage.
With the highest number of promises mentioning in the second thrust – reform the nation’s administration and politics, it is deemed as the most prominent one in order to ensure a more transparent and efficient government structure. Hence, if all the pledges such as to limit the term and power of a prime minister, to separate the powers of the public prosecutor from the Attorney-General’s (AG) Chambers and to upgrade the Malaysian Anti-Corruption Commission (MACC) to be recognised under the Federal Constitution, are able to be implemented, we might see a stronger governance and better transparency that are essential to result in stronger economy.
The local private consumption which remains as the backbone of the economy is likely to receive a boost from several manifesto promises such as to abolish the two-year old GST, reintroduce petrol subsidy for low income earner, to abolish highway tolls, to raise and standardize minimum wages in both east and west Malaysia. Hence, given the improving consumer confidence as well as the several promises from the new government, the local private consumption is expected to remain robust in 2018 and the consumer sector is likely to be one of the biggest beneficiaries.
|Figure 1: Consumer Sentiment Index
On the flip side, this also means that the government spending is likely to increase sharply this year which would translate into higher budget deficit. Therefore, given the current high level of public debt (more than 50% of our country’s GDP), we would witness a certain level of selling pressure in the sovereign debt market.
On top of that, as mentioned by the PH, they will review all the major public projects, hence there is a possibility that some of these government-funded construction projects could be put on review while some businesses might delay their investment until greater clarity which would translate into lower private investment and a sluggish construction activity. In any case, the impact is likely to be only temporary where the construction activity and private investment is expected to pick up momentum in the following years. In fact, we believe that the robust private consumption could offset the temporary slowdown in the private investment.
All in all, we are likely to see a higher volatility in equity market in the short term. Although it would be extremely difficult to predict the severity of the market sell-off especially by the foreign investors, in our view, we do not foresee any significant impact on the local equity market given the expectation that the current solid economic fundamental will remain unchanged and Pakatan Harapan’s victory might bring upon fresh policies to ensure a more prudent government spending and more transparency which will eventually result in a stronger economy.
On top of that, with the current efficiency in the new government in setting up the cabinet and forming the special advisory council that consists of eminent Malaysians – the former finance minister Daim Zainuddin, former Bank Negara governor Zeti Akhtar Aziz, former Petronas president Mohd Hassan Merican, tycoon Robert Kuok, and economist Jomo Kwame Sundaram, we believe it would help to restore market confidence and will be a positive factor for the country growth over the mid to long-term perspective.
In other words, any panic selling in the local equity market is likely to present investors with excellent buying opportunities.