Lead Story: Local stocks face ‘dark’ hour before a new dawn

This article first appeared in Capital, The Edge Malaysia Weekly, on October 15, 2018 - October 21, 2018.
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IT was the new government’s inaugural investors’ conference and the theme was “Malaysia: A New Dawn”. Some 1,200 institutional investors from 10 countries attended the conference, looking for clarity on the future direction of the economy under Pakatan Harapan.

Instead, talk of new taxes and sacrifices in the upcoming budget as well as sector reform uncertainties hurt investor sentiment. This was reflected in the benchmark FBM KLCI’s 2.2% decline last Wednesday, a day after the conference.

Etiqa Insurance and Takaful chief strategy officer Chris Eng tells The Edge that investors are fearful of new taxes, such as capital gains or inheritance taxes, given the lack of clarity on the taxes and sacrifices mentioned at the conference.

“While local investors are already jittery ahead of the Nov 2 budget, foreign investors will likely exit first and ask questions later,” Eng says.

He adds that while a number of the country’s Asean peers and the US have offered either tax amnesty or lower tax rates to encourage the return of offshore capital for the purpose of long-term investment, the threat of capital gains or inheritance taxes may trigger potential capital flight from Malaysia.

“The risks need to be seriously considered to ensure the longer-term growth of the country over the short-term target of balancing the budget, which is hardly expected by investors at the moment,” says Eng.

The market was already jittery last Monday, following the announcement on Sunday of the retender for the underground works for the Mass Rapid Transit Line 2 (MRT2) project. This followed the Cabinet’s decision to terminate the underground work contract of the MRT2 with MMC-Gamuda KVMRT Sdn Bhd, a joint venture between Gamuda Bhd and MMC Corp Bhd.

By Tuesday, Gamuda and MMC Corp had lost RM2.0 billion and RM578.6 million in market capitalisation respectively. Two days after the conference, about RM61.03 billion had been wiped off the market. Some of the top losers over the week included Axiata Group Bhd, MISC Bhd and Telekom Malaysia Bhd.

A fund manager with a local asset management firm agrees with Eng that the outlook for the domestic stock market appears uncertain and says he is “underweight” on Malaysia at the moment, until he sees more clarity on the country’s direction after Budget 2019 is tabled on Nov 2.

“We are not very positive about the Malaysian market. So far, what we have been hearing is very much socialist policies,” he says, pointing to the push for telecommunications companies to reduce pricing, the termination of MMC-Gamuda’s contract to build the underground portion of the MRT2 as well as a potential capital gains tax (CGT) that is being spoken of by some of the political leaders in the ruling coalition’s key component parties,” he says.

Parti Keadilan Rakyat (PKR) vice-president Rafizi Ramli tweeted last week in the national language in response to former prime minister Datuk Seri Najib Razak’s criticism of the CGT, saying that he had contributed to the alternative budget since 2011 to propose a CGT on gains from Malaysian stocks.

PKR is one of the key components in the ruling PH coalition.

“Now, investors and financial institutions [that manage some of the wealthy investment funds] made profits by trading on the stock market without paying taxes. I am not certain how much tax collection from this capital gain in the stock market [will result] but on principle, profits like this should be taxed,” Rafizi said.

Not everyone agrees that the decline is due to fears among investors that the government will introduce policies that will hurt the stock market. Rakuten Trade Sdn Bhd vice-president of research Vincent Lau tells The Edge that the decline in the local stock market is in line with the regional selldown.

“In fact, we have seen some recovery in the local stock market [last Friday] along with some of the other markets in the region. It has more to do with concerns over ... the downgrades on global economic growth by the International Monetary Fund and the rising US 10-year Treasury yield,” says Lau.

He also thinks there are opportunities to buy into some counters, especially companies with good fundamentals, credit and management, that have been affected by the recent selldown.

Founding chairman and co-chief investment officer of Hong Kong-listed Value Partners Group Ltd Datuk Seri Cheah Cheng Hye, however, thinks that regardless of the noise, the problem with the Malaysian stock market is that it is still dominated by the old economy.

“The Malaysian stock market is very much dominated by the old economy, plantation, banking and real estate. We would love to see more new economy, education, technology, healthcare and services. There are some, but not enough. In addition, Malaysia’s primary market has been the laggard in the whole Asia.

“Last year, I believe there were fewer than 20 initial public offerings, compared with 400 in China. There is a lot of work to be done in Malaysia. But another way to look at it is that this market suits me real fine. If I come into a very successful market, I would have too many competitors. I would rather be here now, when there is a lot of room to improve,” says Cheah, whose firm Value Partner just set up an office in Kuala Lumpur.

He warns that Malaysia’s weightage in the MSCI Emerging Markets Index is only 3% now, compared with over 20% in the 1990s.

“If we continue at this rate, as the index includes China, Malaysia’s weightage is going to be zero and we will be increasingly off the radar. We need to do something about this evolving situation,” he says, adding that he is not too keen to invest in Malaysia in the current environment.

“At the moment, I am not very keen to invest in Malaysia. I don’t think the market is undervalued. The price-earnings ratio is about 17 times. That does not make it a particularly cheap market at all. Liquidity is poor, free float is the worst in Southeast Asia. It takes Malaysia 24 trading days to have a turnover equivalent to the average daily trading volume in Hong Kong.”

Add to these the uncertainty over new policies from the new government, are local stocks in for some rough days ahead?


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