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After an eventful week in Malaysia’s politics, Tan Sri Muhyiddin Yassin, President of the Malaysian United Indigenous Party (Parti Pribumi Bersatu Malaysia or Bersatu) was sworn in as the eighth Prime Minister of Malaysia on 1 March 2020.
He succeeds former PM Tun Dr. Mahathir, whose Pakatan Harapan coalition lost support after the breakaway of Bersatu and some members of Parti Keadilan Rakyat (PKR). Tan Sri Muhyiddin leads a coalition government that includes Bersatu, Barisan Nasional, and Parti Islam Se-Malaysia (PAS).
Tan Sri Muhyiddin is one of the founding members of Bersatu. He was also the former deputy premier for six years from 2009 until 2015 under the Barisan Nasional coalition government. He was later sacked from United Malays National Organisation (UMNO) in 2016. Tan Sri Muhyiddin, with Tun Dr Mahathir, founded Bersatu Malaysia in 2016 and joined up with the other parties, later named Pakatan Harapan. He was the Home Minister of Malaysia prior to the turn of events last week.
Market implications
The political divide and the change in government comes at an unfortunate time for Malaysia’s economy. Economic growth was already slowing down in fourth quarter of 2019 and would be impacted further by Covid-19. We expect the market sentiment to be weak and the outlook to be led by the impact of the spread of Covid-19 and the global markets’ direction.
Despite the challenges, the risk of further significant declines for the market may be limited. The FBM KLCI and broader market FBM EMAS indices have declined 3.2% and 4.4% respectively last week as the political situation was unfolding. The FBM KLCI is trading at a Price Earnings Ratio (PER) of 15.0x for 2020, slightly more than 1 standard deviation below historical mean. Some valuation support is seen as the current market valuation is already lower compared to the period after the 2018 General Election when there was unprecedented political change. Additionally, foreign shareholding of Malaysia equities is at a multi-year low.
Going forward, we will be watching closely the new Cabinet appointments, policy direction and announcements, and institutional reforms by the new government. Under the former Pakatan Harapan government, Malaysia ranked 51 out of 180 countries in 2019, up 10 notches from 2018 according to Transparency International's (TI) Corruption Perception Index (CPI). It remains to be seen if the momentum would continue with the new coalition government.
Portfolio implications
Within the ASEAN region, we remain Underweight Malaysia. Apart from the impact of Covid-19, the Malaysian economy also has to contend with uncertainty from the recent political changes. The mitigation to potential downside risks is that Malaysia’s equity valuations and foreign shareholdings are already at the lower end of the range by historical standards. As investors await greater clarity on the new policy direction, we prefer exporters which are involved in manufacturing and technology and defensive sectors such as consumer and utilities.
On fixed income, we continue to be positive on Ringgit debts as we expect the market to remain supported in the near term, based on expectations of lower interest rates. Given the recent political developments and concerns about Covid-19, Bank Negara Malaysia (BNM) is expected to reduce the Overnight Policy Rate (OPR) by 25 bps for the second time this year. This could happen as early as the upcoming BNM monetary policy meeting on 3 March.
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