Malaysia received its 8th Prime Minister yesterday after a week of political chaos. Elected Prime Minister, Tan Sri Muhyiddin, which represents Perikatan Nasional, a coalition comprising political parties from Barisan Nasional and PAS, will now have to select his cabinet and a vote of confidence will ensue at the next Parliamentary sitting on March 9th. In our view, the new PM has a full plate on his hands with economic growth heading towards a 11-year low, weak consumer sentiments and also a challenging external environment. Market observers will likely be keeping a watch on policy changes and structural reforms, although judging from the foreign outflows over the past 2 years, it would likely take strong and speedy execution before we see funds flocking back in a big way. Maintain our Neutral weighting and a year end KLCI target of 1,540.

Event: Malaysia Swore in Its 8th Prime Minister

After a week of chaos and running without a government, the Agong swore in Tan Sri Muhyiddin Yassin, the president of Parti Pribumi Bersatu Malaysia as the 8th Prime Minister (PM) of Malaysia yesterday. PM Muhyiddin represents the coaltion Perikatan Nasional, which is a national cooperation comprising political parties including Barisan Nasional and PAS. The PM would then form his own cabinet and should thereafter take a confidence vote, to determine if he remains in office. The next Parliamentary sitting falls on March 9th .

Impact: PM Can Tackle Current Adversities, If Given Full Support

The country will likely still face a period of political uncertainty. However, going forward, if PM Muhyiddin garners the support, from members of Parliament and also public support, we believe the newly formed government will be able to carry out its functions and also address the current economic challenges, as well as effectively implement the earlier announced RM20bn economic stimulus package (without any delay). We believe policies which could boost PM Muhyiddin’s credibility would include areas of institutional reforms, corporate governance, fiscal transparency and consolidation, as well as structural reforms to improve on productivity and income of the people.

Continued Focus on Sustainable Development

Similarly, Datuk Seri Mohamed Azmin Ali, who we believe will be instrumental on economic policies, will hold a key position (s) in the new Government, and will continue with the agenda of sustainable development of economic activities. He already highlighted that the Government will be “committed towards a national agenda that will spur the economy, ensure shared prosperity, protect the safety and sovereignty of the country, forge unity and ensure institutional reforms." As a first step towards economic progress, we believe government’s continuation to focus on current development of strategic projects, which aligns with the five year Twelfth Malaysia Plan, 2021-2025, likely to be unveiled in 2H2020.

…but Quick Bold Steps Needed

In the near term, it is crucial for the new Government to act quickly and take bold measures to boost public and investors confidence by ensuring the sustainability of economic growth, raise income of the people and reduce cost of living. Nevertheless, if the political uncertainty is prolonged and combined with the global economic uncertainties and Covid-19 outbreak, many investors, be it local and foreign (both long-term and portfolio investors), may hold back their investments pending further clarity on the political environment. However, despite the uncertainty on the political front in the near term, we are maintaining our real GDP growth forecast of 4% in 2020 (4.3% in 2019), in view of the implementation of economic stimulus package. As soon as the political uncertainty stabilises, we believe the risk of a sharp slowdown in private investment is unlikely, with possible improving country’s domestic demand, in a relative low interest rate environment. However, in the medium term, market observers will be focusing on the new government’s strategies to fix the country’s fiscal deficit position, improving macroeconomic fundamentals to maintain the country’s sovereign credit rating outlook by the international rating agencies

Action: Another Unprecedented Event

Already reeling from a transitionary government post GE14, the market is now faced with another unprecedented event. We are uncertain if there would be any unwinding or changes in policies but believe that with a change of guards, there would likely be delays in any implementation of measures and hence market observers likely to remain cautious. Looking back over the past 2 years, major infrastructure projects were put on a hold, not merely on cost grounds but also parties that were aligned with the previous government were being reviewed (we remain Underweight on the Construction sector – please see accompanying note). As such, until there are signs of clarity, we think that foreign investors will likely remain on the sidelines.

Sector and Stock Implications

Stocks such as Eden and Thriven Global which are linked to PM Muhyiddin’s son could see higher investor interests. UMNO and MCA related counters could also be in favour - media companies Media Prima and Star come to mind. The states of Johor and Sarawak may also see greater funding, the former being the PM’s state of origin while Gabungan Parti Sarawak, which was deemed to have lent a hand in supporting the PM. Conversely, there may be some negative implications on sin related sectors, given the inclusion of PAS into the new coalition government.

Maintain Neutral and KLCI Year End Target of 1,540

Given the unprecendented event and a period of market uncertainty, we think that investors will likely remain sideline for now. With the Covid-19 issue at hand and growth prospects being curtailed, we think that the market will have additional issues to deliberate. Maintain our end 2020 KLCI of 1540 based on 17x 2020 market EPS, or -1SD below its 5-year mean. Near term, with enhance market volatility, we continue to advocate a defensive stance, favouring the MREITS and Healthcare sectors. Our other sector Overweights are Rubber Gloves, Plantations, EMS.

Risks

Upside/downside Risks to Our View Include:

i) Continued trade tensions between the US and China, leading to severe disruption in global economic growth. Any easing of the trade tensions would be an upside risk

ii) A sovereign rating downgrade. Malaysia has revised its fiscal deficit targets for two consecutive years. Any further deterioration in its fiscal position sparked by a sharp decline in commodity prices may warrant a review by the rating agencies.

iii) A pick-up in inflation levels in the US and the Fed reacting by accelerating its interest-rate cycle, which could lead to higher-thanexpected outflows of funds from EMs and the region and represents a downside risk.

iv) Corporate earnings disappointments/improvements. The KLCI has de-rated partially due to the earnings disappointments.

V) New Taxes That Could Curb Consumption Spending.

vi) Government successfully executing reforms that significantly improves its fiscal position, enhancing its investment attractiveness and thus encouraging foreign equity inflows. Conversely, any further reduction of MSCI weighting will have negative implications.

vii) Geopolitical tensions arising from North Korea or the Middle East disrupting financial markets; and

viii) Malaysia falls off from the FTSE World Global Bond Index and other related indexes, leading to a sell-down of government securities.

Source: Affin Hwang Research - 2 Mar 2020