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'Greater clarity emerging for Malaysia under Anwar's leadership after years of political instability'

KUALA LUMPUR: With a second shot at power, Pakatan Harapan (PH) is unlikely to repeat the mistakes it made during its first tenure, particularly with Datuk Seri Anwar Ibrahim firmly seated at the helm.

AHAM Asset Management Bhd (AHAM Capital), in its recent research note 'Clarity emerging for Malaysia' dated Nov 30, discussed what Malaysia's political future holds and what investment opportunities may await.

AHAM Capital, formerly Affin Hwang Asset Management Bhd is an independently-managed, institutionally-owned asset management firm.

A Lesson Learnt

The article pointed out that when PH came into power in 2018 under the seventh prime minister Tun Dr Mahathir Mohamad, markets drifted lower as the government introduced a slew of policy reforms that also grounded the wheels of commerce and undermined market confidence.

As a result of backward-looking policy, such as cancelling infrastructure projects like MRT3 and changing CEOs of corporations and government-linked companies (GLC), it said growth was slowed and decision-making was hindered.

It described the abolishment of the goods and services tax (GST) as one of the other populist moves, which led to RM40 billion revenue shortfall, while the price cuts for broadband decimated markets as investors grew concerned about other socialist policies.

"With a second shot at power, PH is unlikely to repeat the same mistakes and policy flip-flops that plagued its first tenure especially with Anwar now firmly holding the reins.

"Channel checks with party officials also reveal an acknowledgement of the need to be more practical and nuanced in setting policy directions as well as communicating them," the article read.

Eyes on Cabinet Formation

AHAM Capital said while the unity government had yet to be unveiled at the time of writing, expectations are high for a "much leaner Cabinet comprising a mix of technocrats and politicians that would help drive economic policies."

Key cabinet roles such as finance could set the tone for other ministries, so monitoring them would be important, it said.

"It is hoped that the new unity government which effectively commands a two-third majority in Parliament would be able to close ranks and restore political stability in order to carry out much needed fiscal and institutional reforms to attract foreign interest and invigorate the economy.

"These include broadening the country's revenue tax base and rationalising a ballooning subsidy bill that is projected to hit RM80 billion this year."

If these reforms can be effectively carried out, AHAM Capital foresees a reversal of foreign fund flows and one that would help revitalise the local equity market.

Technicals are Favourable

Due to political instability, the local market has been struggling for years, it said.

"Since 2014 to date, when 1MDB issues started hitting the market, the local equity market fell by over 18 per cent in Ringgit terms or 40 per cent in US$ terms, as US$15.9 billion worth of portfolio monies flowed out.

"Foreign shareholding reached a 10-year low as political uncertainty dissuaded foreign investors from ploughing money. Domestic institutional funds have been also highly cashed-up as they sit on the side-lines.

"Crucially, if there is a return of political stability and a growth story, foreign inflow could drive our markets higher. In every year between 2010 to 2021, whenever there is net foreign buying, our market has been driven positively higher."

With "emerging clarity and successful execution of policies", AHAM Capital expected the local market to gradual ascend higher as it climbs over walls of worry in the political sphere.

"The first obstacle is when Anwar tests his parliamentary majority through a vote of confidence on the 19th December when Parliament convenes. "With low positioning and foreign funds underweight Malaysia, we could see as much as RM10 billion in terms of foreign inflows, should foreign investors neutralise their benchmark-weights in Malaysia as confidence grows with greater clarity."

AHAM Capital said Malaysia could emerge as a prime growth destination for reinvestment and political stability in the region after being out of the radar for so long.

"We've seen strong appetite for Malaysia as evidenced by the sharp gains seen in the local market when Anwar was appointed as prime minister which ended the political impasse.

"The rally was broad-based across sectors and driven by both domestic and foreign inflows suggesting that investors are willing to relook at Malaysia again for opportunities."

Portfolio Positioning

AHAM Capital said incremental positives domestically as well as in the macro environment with tentative signs showing US inflation peaking could signal an inflection point for Malaysian equities as the Fed tones down its hawkish rhetoric.

"A renewed zeal to carry out reforms and to avoid repeating the same mistakes also augurs well for the unity government as it finds its footing.

"While recognising that there is a timing trade-off between waiting for more clarity but also potentially missing out on gains, we find the balance of risks tilted towards the upside."

AHAM Capital said it was taking a selective approach towards building exposure through large caps in particular:

- Banks which continue to offer attractive dividend yields;

- Property stocks as a potential investment cycle play;

- Healthcare names given potential doubling of budget spending here;

- Beneficiaries of labour shortage restructuring;

- Beneficiaries of Ringgit strength and subsidy restructuring and;

- Reopening-plays as more cross-border restrictions are lifted

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