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Markets nervous ahead of Malaysia poll
With the outcome of today’s Malaysian general election uncertain, financial markets are braced for volatility
Malaysia goes to the polls today for what is expected to be the closest general election in its history. Last time around, in 2008, when the outcome turned out to be a surprise – with the ruling Barisan Nasional (BN) coalition losing its two thirds parliamentary majority for the first time – the stock market fell 9.5% the following day.
The impact on the markets will again depend on the election results but this time investors will have to give their verdicts very quickly. The results will probably not become clear until a short time before Bursa Malaysia opens tomorrow morning.
According to UBS analyst Chris Oh there are three possible outcomes. The first – and UBS’s base case – is an incumbent government victory with a similar or slightly smaller majority than in the 2008 election, with the current leadership retained “with minimal political fallout.”
In this instance, Oh said the market should enjoy a “relief rally given that the event risk has passed and we have political stability and policy status quo”. The stronger the win, the larger the likely post-election rally. Post-election, he would expect reform to continue to be implemented in this scenario.
The second possible outcome is a narrow BN win, triggering an internal leadership struggle within UMNO, the party that leads the BN coalition. If that happened, “policy changes may be necessary to pander to the narrowing support base for the leadership,” making reform tougher to enact, Oh said.
“We anticipate that the market would drift sideways or down as investors remain on the sidelines in anticipation of delays in policy implementation.”
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If this were to happen, Oh said “the fear of the unknown becomes the greatest risk factor”. He raised the possibility of civil disorder, policy shifts, and a standstill in the public delivery system. “Due to the high level of uncertainty, equity investors would likely reduce weightings in the equity market at least until the new government establishes itself and provides political stability and a clear policy direction.”
While that sounds negative in the short term, “the likelihood is that the market would re-rate strongly as the emergence of a strong two-party political system can only be positive for the structural long-term development of the country,” Oh said.
Analysts noted some other variables in play. Sanjay Mathur of RBS said that all parties appeared to be promising higher subsidies and other income support. “Even if these promises are partially realized, the country’s fiscal position is likely to be compromised,” Mathur said, adding that public debt in Malaysia, at 52% of GDP, was already close to a national self-imposed limit of 55%.
Malaysia is vulnerable to changes in international sentiment as foreign investors hold more than 40% of the country’s government bonds and over half of its central bank bills.
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