If you are already invested, or are planning to invest in the country, here are our predictions on what the Malaysia Election outcome will have on your holdings

There is little doubt that the Pakatan Harapan (PH)’s recent Malaysia Election win took everyone by surprise. The opposition party scored 5.8 million votes (48 per cent) in GE14, compared to four million (34 per cent) for Barisan Nasional (BN), the previous ruling party. For many, it was cause for celebration, indeed. But for others, especially investors, there was reason to be concerned, as with any change in administration.

If you are already invested, or are planning to invest in the country, here are our predictions on what the Malaysia Election outcome will have on your holdings.

With a campaign focused on anti-corruption and the rising cost of living, the PH’s agenda could improve corporate governance (and equity prices) in Malaysia significantly over the long term. This is despite short-term transitional risks, which saw knee jerk sell-offs in both the ringgit as well as stocks on the Bursa Malaysia.

The emerging new team made numerous business and trade friendly remarks after being sworn in. PH chairman and current prime minister Dr Mahathir Mohamad said that Malaysia would seek friendly relations with other nations, regardless of ideology. This is likely a reference to Malaysia’s identity as a trading nation.

An export-focused growth strategy would coincide with Dr Mahathir’s previous stint as Prime Minister (from 1981 to 2003). It is also consistent with the notion of ‘catch-up’ growth. The aim is to boost Malaysia’s existing US$9,500 (S$12,700) per capita GDP to developed world levels (US$12,236, S$16,425).

The country’s top candidate for finance minister, Lim Guan Eng, has a notable track record. He was Penang’s chief minister from 2008 until May 2018, and will likely take on some of the new administration’s most urgent priorities.

However, the planned transition of Datuk Seri Anwar Ibrahim back into power may see some short-term volatility. A healthy Mahathir-Anwar relationship, and strong leadership, is needed to hold the PH alliance together. Any instability will be a negative for Malaysian asset prices, as well as the more fundamental goal of cleaning up corruption.

Opportunities And Challenges In The Export Sector

Malaysia is host to a number of semiconductor companies, such as Unisem (M) Bhd, Globetronics Technology Bhd, JF Technology, ViTrox Corp Bhd and Pentamaster.

Collectively, these comprise its electronics and engineering sector, which is Malaysia’s largest export sector. Investors should keep a lookout for government policies friendly to this sector, such as tax breaks, commitment to better infrastructure, skilled manpower policies etc.

It is also notable that the Bursa Malaysia Technology Index rose significantly in 2017. Investors may therefore need to be stringent on bidding for fair valuations within this broader sector.

Opportunities And Challenges In The Commodities Sector

Malaysia has significant natural endowments in agricultural commodities such as palm oil. Felda Global Ventures Bhd is the world’s largest palm oil producer. Malaysia itself is the world’s second largest palm oil producer, after Indonesia.  Government policy has a role to play in enhancing the industry’s export competitiveness. For instance, Malaysia’s crude palm oil tax of 5.5 per cent was suspended in January this year to give this sector’s exports a boost.

A word of caution: Investors should factor in risks from recent protectionist sentiments on global trading markets. Malaysia’s relatively small share of global trade makes it unlikely to be a direct target. But it could still be affected by the weakening of multilateral trade agreements and norms.

Opportunities With Consumer Companies

The planned abolition of Goods and Services Tax (GST) is likely to have a net positive effect on domestic retail spending. The new government is also looking at reintroducing fuel subsidies, which will enable consumers to spend incrementally in other areas. Therefore, companies with exposure to Malaysian consumer consumption may benefit. Examples include Fraser & Neave Holdings Bhd, Carlsberg Brewery Malaysia Bhd, and Heineken Malaysia Bhd.

Challenges With Construction And Infrastructural Companies

Finance minister nominee Lim has said that he would review contracts “that are not in favour or do not benefit Malaysia”. One such project is the planned High-Speed Rail between Kuala Lumpur and Singapore.

Delays to, or cancellation of, this project will have a short term negative impact on the Malaysian construction industry. There may also be spill-over effects on Malaysian real estate prices around the planned rail terminals, and Singaporean real estate prices in the western part of Singapore.

Another project at risk is the US$100 billion Forest City mixed development, located in Johor. Dr. Mahathir objected to this development during his election campaign. Potential investors or clients of this project should therefore wait for clarity on its future before committing additional capital.

Last Word

Malaysia’s new trajectory puts it on a slightly riskier path in the near future. But also one that is likely to be far more rewarding in the longer term. The new government’s mandate to eradicate corruption will render Malaysian equities more attractive to both domestic and foreign investors. Meanwhile, the planned tax cuts should boost domestic consumption.

Within this context, the export-focused and retail sectors are likely to benefit in the short term. However, companies with exposure to Malaysian construction firms may encounter headwinds as the government seeks to rationalise costs. Ultimately, investors should also keep an eye on the stability of the governing alliance when reviewing their portfolios.

Ed’s note: Our financial advisors are on hand should you be interested in starting a different type of investment portfolio.