Strategy Note /

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

  • New Prime Minister Sabri has, at best, 52% support in the lower house of parliament

  • Sabri is vulnerable to defections from his own party, UMNO, which has merely 16%, and a vote of confidence

  • Malaysia equities are cheap versus history and its FX rate is low risk but there are better options elsewhere in Asia

Malaysia's new PM is not a fix for dysfunctional politics
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
23 August 2021
Published byTellimer Research

Malaysia has a new Prime Minister, Ismail Sabri, who was the former deputy prime minister. He is backed by much the same parliamentary coalition as his predecessor, and a wafer-thin one at that (52%).

Although Sabri hails from the UMNO party, which dominated politics until its 2018 election loss, this is in no way a return to the old system, with his party controlling merely 16% of the lower house, vulnerable to defections and unlikely to attract members of the opposition, who will save their ammunition for a vote of confidence. Moreover, the next election is coming up, and may take place before the September 2023 due date.

Dysfunctional politics portends more middle-income mediocrity for Malaysia. The power struggle between political grandees Ibrahim, Razzak and Mahatir remains unresolved.

Malaysia equities (KLCI) are up 1% month-to-date and down 9% year-to-date. Forward PB is 1.4x, around a 10% discount to the 5-year median, for 11.4% ROE. Forward PE is 13.5x, about a 15% discount to the 5-year median, for 20% consensus earnings growth in 2021 (and 3% decline in 2022).

For local investors, forward dividend yield of 4.1% is attractive compared with the local currency government 5-year bond yield of 2.7% and a real interest rate of negative 1.7%.

For foreign investors, FX rate is low risk, despite 66% external debt (public and private) to GDP, because of over 3.5% current account surplus, over 6 months of import cover and upside to fair value implied by REER (in absolute terms and relative to the 10-year median).

However, among small EM Asia peers, there are more compelling alternatives for growth (Bangladesh, Vietnam) or a mix of reform and value (Indonesia, Pakistan, Philippines).

Malaysia's hung parliament: No stable majority for any PM

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