Research  
What’s Done In 100 Days August 17, 2018
In this article, we would like to review some of the market events that happened over the past 100 days and to share with investors our view regarding the Pakatan Harapan’s first 100-day.
Author : Jerry Lee Chee Yeong


What’s done in 100 days
  • Not all 10 promises are fulfilled by PH government

  • Financial market (Equity & Fixed Income) rather stable over the past 100 days

  • Ringgit depreciated due to the broad Dollar strength

  • Improving Consumer Sentiment (21-year high) and Business Confidence (3-year high)

  • Focus on Budget 2019 and upcoming economic policies

  • Consider Malaysia small cap given its better prospect and attractive valuation

In Chinese custom, the 100-day celebration for newborns is deemed to be an important day as it represents the wish that the baby will live 100 years. 17th August 2018 marks a very important day for Malaysia’s new government – Pakatan Harapan, as it is the 100 days milestone in office.

As the deadline looms, we have started to see plenty of news headlines mentioning the undelivered promises set by the new government. No doubt, promises are not meant to be broken by anyone especially the politician. However, in politics, we could not rule out that some of these promises might have been used to attract more votes and to secure the election victory.

In this article, we would like to review some of the market events that happened over the past 100 days and to share with investors our view regarding the Pakatan Harapan’s first 100-day.

What are the promises?

Table 1: Promises by PH Government

Based on the current progress, we can observe that not all the promises made by PH can be realized during the first 100 days, but at least some of the important pledges were fulfilled such as the removal of GST and stabilizing of petrol price which aimed to tackle the high cost of living as well as the reassessment on the previously awarded mega infrastructure projects which could help to tackle the country high debt issue.

On top of that, the establishment of the Council of Eminent Persons which holds the responsibility to advise and assist the government was a move that deserves applause. Reason being, despite the massive foreign outflow, it has at least inspired the confidence of local institutional and retailer players which supported the local financial market.

What has happened over the past 100 days?

Financial Market Recap

1. Equity Market

Malaysia equity market as represented by FBMKLCI Index, swung as much as 75 points during the first trading day under the new government administration, falling to a low of 1,800 points in the early session in a knee-jerk reaction before recovering and ended the day with about 4 points higher. As of 16th August, FBMKLCI index has registered a loss of -3.8% amid significant foreign fund outflow while the small cap segment as represented by the FBMSC managed to clock 3.6% of profit since 8th May 2018.

Figure 2: Malaysia's equity performance

Following the Pakatan Harapan's stunning victory in the 14th General Election, several industries saw earnings downgrades amid the policy uncertainties on the local front. The telco sector saw earnings downgraded by more than -6% due to the PH’s plan to double the internet speed with half the price. The labor-intensive industry – Plantation saw earnings downgraded due to the possible hike in minimum wage while the construction, materials and industrial products sector also affected by the government decision to scrap several infrastructure projects such as HSR line and MRT 3.

2. Fixed Income

On the fixed income side, although the May’s data showed the most severe foreign fund outflow in Malaysian Bonds over the past 1 year, the performance was relatively stable, with 3-year and 10-year MGS yield increasing by only 5.1 bps and 6.7 bps. Looking at the recent data, the local fixed income space has delivered a rather resilient performance as compare to the Asian and Emerging market peers, with yield for 3-year and 10-yield MGS decreased by -13.1 and -6.8 bps respectively for the period between 8th May to 16th August 2018.

Figure 3: Changes in Foreign Holdings in Malaysia Debt Securities

3. Ringgit

On the currency front, ever since GE-14, Ringgit has depreciated about -3.8% against USD amid the increased foreign outflow from both the local equity and bond market. However, the recent Ringgit’s weakness was mainly due to the broad dollar strength given the strong macro in US that could continue support the expectation of a higher US interest rate.

figure 4: USDMYR

Improving Consumer and Business Sentiment

After the recent unexpected change in Malaysia government, Malaysia’s consumer sentiment index (CSI) soared to a 21-year high level of 132.9 points and it marked the first time in four years that the index has breached the 100-point optimism threshold. The surge in consumer sentiment was supported by the less concerns on inflations, expectation of higher income and lower unemployment.

According to the survey, the biggest driver for the improving sentiment was the zero-rated GST which was expected to reduce the cost burden for the consumer.

On top of that, another survey that recently carried out by an independent global market research firm, Ipsos, showed more than two-thirds of Malaysians are confident that the country is on the right path for continuous growth under the new government.

Meanwhile, the local businesses also shared the same upbeat outlook in 2Q2018, with the MIER’s Business Conditions Index (BCI) climbing to a 3-year high level at 116.3 points. The improving business condition was underpinned by higher domestic orders, investment and the expectation of increasing production and external demand in coming quarters.

figure 5: MIER Consumer Sentiment & Business Condition Index

The MIER survey was consistent with the recent International Business Report by Grant Thornton that showed better business confidence in Malaysia due to the new government’s emphasis on accountability and transparency that would eventually translate into a more favorable business environment

Conclusion

At this point in time, clearly that the new government is unable to fulfill all the 10 promises that they have made earlier but is this considered as failure? For some people, maybe. However, note that the cabinet is fresh and it might be unfair to judge or assess the performance of the PH government over just the 100 -day period.

With the commitment that the PH government has shown in tackling the cost of living issue as well as combating corruption, rectify our country’s reputation and to rebuild the global investors confidence in Malaysia, perhaps the better Malaysia is not far away.

In fact, the more constructive thing that we should be doing is to focus on the upcoming Budget 2019 as well as the economic policies that the government is going to propose instead of trying to score the 100-day performance of the PH government.

For the prospect of Malaysia equity market, we see higher upside potential in the Malaysia small cap segment as compared to the larger cap companies given the current Ringgit weakness, its attractive valuation and the absent of foreign fund that usually support the big cap company. Hence for investors who want to tap into the investment opportunity within the Malaysia small cap space, they can consider Eastspring Investment Small-cap Fund, Eastspring Investment Islamic Small-cap Fund or KAF Tactical Fund.

See also: 3 Key Investment Themes To Focus Now


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