Strategy Note /
Malaysia

Malaysia early election will not fix its politics but its equities are cheap

  • Early election called to maintain UMNO party unity, win before more corruption cases heard, build on state election wins

  • Differences with 2018 election: Mahatir no longer unites opposition and floor-crossing post-election is now banned

  • Even if UMNO win big, Malaysia politics likely to remain unsupportive of reform. But equities and FX rate are cheap.

Malaysia early election will not fix its politics but its equities are cheap
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
10 October 2022
Published byTellimer Research

In Malaysia on 10 October Prime Minister Ismail Sabri called an early election, likely before mid-December 2022 instead of before May 2023. An election is not likely to bring about the coherent parliamentary majority Malaysia needs in order to enact structural reform and escape its middle income trap.

Equities and the FX rate are cheap versus historic average, but commodity prices (palm and crude oil), regional manufacturing conditions (China-related supply chain), and global demand for its assembled electronics are more likely positive catalysts than more constructive domestic politics.

Malaysia's fragmented politics

Reasons for early election

Sabri has multiple reasons for calling an early election.

  • Maintain unity within his UMNO party, where Sabri is more junior than the likes of former PM Najib Razak, now convicted of corruption, and party leader Zahid Hamidi, who faces ongoing corruption cases – both Razak and Sabri hope for some relief in their cases should UMNO secure a new political mandate.

  • Build on recent wins in local state elections in the last year (75% of seats in Melaka in November 2021 and 71% in Johor in March 2022)

  • Seasonal rains and flash floods are likely to hamper opposition mobilisation and voter turnout, which suits the more established parties, of which UMNO is the most established.

  • Take advantage of a divided opposition, with Mahatir Mohamed no longer the unifying force he was prior to the 2018 election win for the coalition he established with Anwar Ibrahim.

Aged rivalries and fragmented politics

The rivalry of aged political grandees – Mahatir Mohamed (97), Anwar Ibrahim (75), Najib Razak (69), and Zahid Hamidi (69) – has already spawned many parties in the fragmentation of UMNO, which has been at the core of all Malaysian governments since 1957 independence (except for 2018-2020). And this rivalry appears to be unending.

Ironically, there appears to be no major difference of opinion between different political camps on policy, but obstructionism prevails. All seemingly accept the need for:

  • Economic orthodoxy (inflation and fiscal deficit control);

  • Balance in domestic ethnic interests (ie promising inclusive growth for all but prioritising the 50% ethnic Malay population); and

  • Balance the geopolitical pull of the US-centric and China camps.

  • Structural reform to raise productivity (ie better infrastructure, more efficient public procurement, empowering anti-corruption institutions and practices, raising education standards, increasing female labour force participation, improving the ease of doing business).

However, their rivalry and inability to form a coherent and stable parliamentary majority inhibit the implementation of any difficult policies on structural reform.

Even if UMNO secures a large majority that may well bring to the surface long-simmering rivalries within the party – eg between former Sabri and Muhyiddin, party leader Zahid, and former PM and party leader Razak.

Furthermore, in the event of a big win for UMNO, what remains uncertain is how sensitive the public might be to the appearance of any interference in ongoing corruption cases affecting UMNO leaders, particularly should a pardon be forthcoming for Razak.

Najib still appeared to be a net asset, rather than liability, for UMNO in the state election wins in Melaka and Johor, albeit both of these took place prior to his conviction.

Equities and FX rate cheap versus history

Equities and the FX rate are cheap versus historic average but commodity prices (palm and crude oil), regional manufacturing conditions (China-related supply chain), and global demand for its assembled electronics are more likely positive catalysts than domestic politics.

Malaysia equities PB at 15% discount to 5-year median

Malaysia REER 5% below 10-year median

Related reading

Malaysia's new PM is not a fix for dysfunctional politics, Aug 2021

Malaysia political dysfunction persists, more middle income mediocrity ahead, August 2021

Malaysia PM loses his coalition partner amid rampant Covid (July 2021)

Malaysia's failures on Covid and reform may not be fixed by an election (June 2021)

Malaysia's next fragile government led this time by Anwar, (Oct 2020)

Malaysia: Fragile government in peril, no guarantee of a stronger one (Sep 2020)

Malaysia: Government weakened by Najib verdict, politics a drag (July 2020)

Malaysia: Old men lacking in confidence but not ambition (May 2020)