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 middle-income trap
Malaysia corruption (ESG)
Corruption: The ugly truth for EM and ESG investors, (July 2020)