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Malaysia

Malaysia set for another fragile coalition after election; still cheap though

  • No outright majority: 47% for Muhyiddin and Sabri's PH-BN, 39% for Anwar's PH plus; swing vote belongs to Borneo parties

  • Two larger blocs already have internal stresses so dim prospects of broadening either one to a stable broader coalition

  • Malaysia's parties do not disagree much on economic policy but without strong government investment likely stays subdued

Malaysia set for another fragile coalition after election; still cheap though
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

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Tellimer Research
20 November 2022
Published byTellimer Research

The Malaysia general election on 19 November has not resulted in a clear outright majority in the lower house of parliament. This is in line with expectations and the pattern of politics since, at least, early 2020. Malaysia equities and currency are cheap relative to historic average but another weak government is likely to keep investment, from domestic and foreign sources, subdued.

Two blocs with no majority but plenty of internal stresses

  • The main members of the previous ruling coalition — Muhyiddin's Perikatan Nasional and Sabri's Barisan Nasional — won 47% of seats.

  • The main members of the opposition before the election — Anwar's Pakatan Harapan — won 39%.

  • This means that both of these blocs will court the parties from the east Malaysia — the Borneo island regions of Sarawak and Sabah — which, along with other small parties, won 17%.

There are stresses within each of the larger blocs — eg, within PN-BH over the issue of conviction for and ongoing investigation of corrupt activities, and within PH over succession to Anwar.

Therefore, it seems unlikely that an even broader coalition, involving the east Malaysia parties, is going to be any more stable and coherent than the coalitions of the last two or three years.

Malaysia set for another fragile coalition

There is little difference in economic and foreign policies favoured by most parties, instead they tend to differentiate more on ethnic grounds.

And the biggest drivers of Malaysia's fortunes are external — global prices of commodities like crude and refined oil, palm oil, rubber, iron, China supply of intermediate manufacturing inputs, and global demand for electronics.

But the lack of a stable and coherent governing coalition likely keeps domestic and foreign investment subdued.

Malaysia total investment hit by 1MDB scandal and Covid

Malaysia FDI well below levels seen before 1MDB scandal

Equities are cheap versus history

Malaysia equities (FTSE Bursa Malaysia KL Composite index) are down 15% year to date in US$ total return terms, better than most in Asia, except for Indonesia (up 1%) and India (down 2%).

Trailing price/book is 1.3x (for 17% ROE), a 13% discount to the 5-year median.

Forward 2022f price/earnings is 14x (for 5% consensus earnings growth and 4.2% dividend yield), a 14% discount to the 5-year median.

Malaysia equities PB at 13% discount to 5-year median

FX rate is also cheap versus history

The currency is down 10% ytd. A reversion to the 10-year median real effective exchange rate would imply 20% upside to the spot rate.

While there is no immunity from US dollar strength, Malaysia is less vulnerable than many others in emerging markets. Although short-term external debt is equivalent to FX reserves:

  • Real interest rate is negative 1.8% (with policy rate of 2.75% and last reported inflation of merely 4.5%).

  • Current account balance should average 2% of GDP over 2022-23, according to IMF forecasts.

    • Net fuel exports are about 4.6% of GDP at current crude oil price (US$87 pb).

    • Net food exports are about 3.0% of GDP at current food prices (UN FAO index at 136).

  • FX reserves import cover is four months.

Malaysia FX rate: 7% upside implied by 10y median REER

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