This article first appeared in The Edge Financial Daily on July 13, 2018

KUALA LUMPUR: A clearer direction from Malaysia’s new administration on its fiscal policies is likely to bring foreign investors back into the market, Standard Chartered (StanChart) said.

“(For) foreign investors in the bond market, more visibility (on policy) is a positive sign if you’re looking to buy government bonds,” said Manpreet Singh Gill, StanChart’s head investment strategist, at a global media briefing yesterday.

He said the government will have to be more transparent regarding its stance on the fiscal deficit and what they will do to manage it, even as ongoing structural changes are viewed positively.

“Some project deference has happened, but if you think about it as a bond investor what that shows is more attention to the fiscal deficit, which is actually quite important. The fact that we’re putting more attention on that ... is a good thing,” Manpreet said.

Danny Chang, head of managed investment and product management at StanChart, said investors had previously expected a widening fiscal deficit under the Pakatan Harapan (PH) administration’s pledged policies.

“The more information comes in, the more improvement we will see in the (firming up of) expectations,” he said, adding that the key question investors looking at Malaysia want addressed is how the fiscal budget will be funded.

A recent report in The Straits Times, citing government sources, wrote that the new PH government can balance its books this year despite the abolition of the goods and services tax as it is cutting down spending on large infrastructure projects.

At this juncture, one factor investors do not seem to have accounted for is the price of Brent crude oil which, at US$74.60 (RM301.38) currently, is higher than the figure used to calculate Malaysia’s 2018 Budget, said Chang.

Investors may also have failed to price in Prime Minister Tun Dr Mahathir Mohamad’s previous success at reducing Malaysia’s fiscal deficit ahead of the 1997 Asian Financial Crisis during his first tenure as prime minister, he noted.

Finance Minister Lim Guan Eng also successfully ran budget surpluses previously in his former position as Penang chief minister, Chang pointed out.

“Both of them them have this track record, which the market is not giving any premium to at this point in time,” he added.

He said the outflow of foreign funds from Malaysia may bottom out at some point, as some 70% of foreign inflow in the second half of 2017 has been offloaded in the selldown since February this year.

Bond yields attractive but equities expensive

While Malaysian equities look attractive from a dividend-yield perspective, they are also trading at a premium compared to other Asian stocks, Chang said.

Earnings of Malaysian companies have also lagged behind other Asian, ex-Japan, companies after a disappointing results season in the first quarter of 2018. However, their stocks continue to trade at price-earnings ratios of about 15 times higher than the broader Asian market, he noted.

“If Malaysia’s valuation can match the rest of Asia, then that makes (investing in local equities) a little bit more compelling,” he said.

So, as a more yield-orientated market, Malaysia may not look as attractive as high growth sectors in the US and China, which have recorded stronger-than-expected earnings growth in the first half of 2018 so far, Manpreet said.

But Manpreet said Bursa Malaysia-listed stocks are likely to continue seeing upside amid the global bullish view on equities, which typically offer better returns than other asset classes at the current late stage of the world’s economic cycle, when interest rates are likely to rise, amid monetary tightening.

“It would be very unusual for Malaysian equities not to also do well when most regional and global equity markets are doing well,” he said.

Ringgit to end 2018 at ‘about 3.90’

StanChart views US dollar movements as the “single most important factor” to watch when it comes to understanding global investment flows.

But while it expects the dollar index to continue its stronger-than-expected rise against other major currencies in the near term, the investment house is bearish on the currency in the medium to long term in light of the US’ trade and budget deficits, as well as a narrowing real interest rate differentials between the US dollar and the euro.

As such, StanChart believes the ringgit may trade at “about 3.90 to the dollar” by year-end, Manpreet said. The ringgit last traded yesterday at 4.041 against the greenback.

Dollar movements would likely continue to dominate foreign investors’ decisions, said Manpreet. “Unfortunately, now it’s a lot more about the global picture than what is happening here in terms of flows,” he said.

And regardless of the growing tensions between the US and China, StanChart  remains most bullish on US and Chinese stocks, particularly in the technology, energy and financial sectors after stronger-than-expected profit figures in the first year.