This article first appeared in The Edge Malaysia Weekly on May 6, 2019 - May 12, 2019

That Malaysia’s stock market remains depressed, down nearly 12% a year after Pakatan Harapan’s historic win in the 14th general election says a lot, foremost of which is that investors still need convincing.

The extent of corruption and debt left by the previous Barisan Nasional government left PH reeling and fumbling for solutions. But legacy problems notwithstanding, the inexperienced administration contributed to the general malaise affecting the economy and stock market by its policy flip-flops, made worse by ineffective articulation and communication of its policies.

That said, PH appears to be taking the waning economic pulse more urgently.

Take the recent revival of mega infrastructure projects such as the East Coast Rail Link (ECRL) and Bandar Malaysia projects for instance. The multiplier effects from these projects are expected to benefit many sectors of the economy, including the stock market, analysts say.

TA Securities chief investment officer Choo Swee Kee observes that the stock market often reflects the health of the economy. But he is quick to point out that PH needs time to review existing policies and project contracts, which while disruptive, has resulted in significant cost savings.

The greater attention to the economy aside, he notes, “I would like to say that the best initiatives taken by the government is the reduction in corruption and the improvement in the efficiency of the public services.”

The improvements are being monitored by investors.

On May 1, Datuk Seri Nazir Razak, the youngest brother of former prime minister Datuk Seri Najib Razak, told Bloomberg he is “quite hopeful” that the worst is over, noting that investors do not like short-term uncertainties. He believes Malaysia’s stock market is set for a rebound now that PH has spent the past year getting its fiscal house in order.

One huge uncertainty that appears to have been resolved is Malaysia’s relationship with China as both countries have now agreed on how the China-led ECRL project will be revived. Chinese juggernauts Alibaba and Huawei have indicated their interest in setting up ICT centres in Malaysia, which is bound to attract other investors in turn.

On the initial public offering front, the past year has been lacklustre given the scarcity of interest, especially as lower valuations and insipid market sentiments have deterred bigger companies.

Against this background, integrated poultry producer Leong Hup International Bhd’s impending IPO, which is set to raise some RM1 billion, has drawn considerable institutional and retail interest.

Foreign investors have been slow to return after selling down in the wake of PH’s house-cleaning exercise, which had prompted a selldown in certain sectors, including e-government services and construction.

E-government companies such as MyEG Services Bhd and Prestariang Bhd, once investor favourites owing to perceived ties to BN, saw their share prices decline by more than 70% following the change in government. It was a similar story for construction companies Gamuda Bhd and George Kent (M) Bhd as the ECRL and other infrastructure projects came under review.

MIDF Investment Bank head of research Mohd Redza Abdul Rahman thinks that the overreaction has brought about a wealth of opportunities for investors. He cites the almost 40% jump in the KL Construction Index year to date. “Some of these gains resulted from the overreaction as well as newsflow over the past few months,” he says.

The parlous state of some of Malaysia’s bigger institutional funds will make market boosting more challenging, cautions Inter-Pacific Securities head of research Pong Teng Siew. “There is a lack of liquidity in the stock market. When the foreigners are not buying, it is the local institutions that need to sustain the market, but there is no idle money on the side.

“The money is currently being used to repair our institutions, such as FELDA and Tabung Haji. For example, when Tabung Haji is in the midst of improving its financial position, it is hardly going to invest in the financial markets. The last time we saw money supply for investing into the stock market at such low levels was when [crude oil] prices fell in 2014.

“We are actually fighting many battles on different fronts as domestic liquidity is in short supply and thus, liquidity needs to come from foreign investors, but this is not happening. It is difficult to say when the situation will stabilise as far as the foreign funds are concerned as it would depend on the trade war and whether central banks around the world are pumping in fresh liquidity.”

TA’s Choo recalls the heady 1990s when gross domestic product grew at 7% to 8%. “If we can achieve such growth again, I am confident our stock market will be robust.”

But even on the back of more moderate growth of 4% to 5%, many private investors, including private equity funds, indicate they are willing to invest and are awaiting the right signals.

A firmer ringgit, an improvement in policy articulation and a steadier economy could go a long way towards building the confidence required for investors to head back to the stock market.

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