A Malaysian corruption scandal that reverberated across the globe helped fuel years of stock underperformance, but the tide may be changing.
The country’s benchmark stock index has risen 3.5% this year, even as many global indexes have seen modest declines, and become a relative outperformer in Asia.
“Two years ago, sentiment was really at the bottom and our clients would have told us ‘I don’t expect much,’” said Tuan Huynh, chief investment officer and head of discretionary portfolio management in Asia-Pacific at Deutsche Bank. “I’m surprised, I have to admit, that Malaysia was able to make that quick turnaround.” The firm began to buy more Malaysian stocks in the second half of last year. Its portfolio now has a slightly larger portion of Malaysian stocks than its official neutral position.
Concerns about alleged fraud linked to 1Malaysia Development Bhd., and lackluster consumer spending, saw many investors pull back from Malaysian stocks.
Six months ago, the FTSE Bursa Malaysia KLCI was badly lagging behind peers. Now the stock benchmark is up 9% from early December’s bottom.
The country’s market for initial public offerings may also be about to fire up. Several potential billion-dollar stock offerings are in the pipeline for 2018.
And investors are increasingly convinced by the staying power of Malaysia’s economic uptrend. The country’s economic growth rate slowed to 4.2% in 2016, but it increased to 5.9% in 2017. Many observers anticipate a similar increase for 2018, aided by government spending ahead of next month’s national election.
The consensus is Prime Minister Najib Razak will remain in power, despite criminal investigations into 1MDB still being carried out in several countries, including the U.S. Mr. Najib oversaw 1MDB, and has denied wrongdoing, and Malaysia’s attorney general has cleared Mr. Najib of wrongdoing.
Victory for the incumbent coalition would signal economic stability, said Frank Benzimra, head of Asian equity strategy at Societe Generale.
But Alex Holmes, Asia economist at Capital Economics, said maintaining the political status quo would mean “the institutional problems hampering Malaysia’s economy are unlikely to be solved.” He said such challenges include the affirmative-action policies designed to benefit Malaysia’s majority Malays, which critics say hamper the economy by preventing the most capable from rising to the top. A win for Mr. Najib also raises questions about whether economic corruption will be tackled, Mr. Holmes said.
Still, investors have taken a shine to Malaysian assets. Malaysia’s ringgit is the strongest major Asian currency against the dollar this year, according to financial-data provider FactSet. It has climbed nearly 4%.
Malaysia and India are the only emerging markets in Asia that have seen net foreign stock inflows this year. Malaysia’s net inflows totaled $869 million as of April 20, according to Credit Suisse data.
An added boost for Malaysian equities is crude oil prices being at their highest levels in 3 ½ years. The country has been a sizable exporter of liquefied natural gas, prices of which are closely linked with crude. Higher oil prices could result in GDP rising more than expected, said Japanese investment bank Nomura. – Wall Street Journal
This article was first published in the Wall Street Journal. For the original article, CLICK HERE