SENTIMENT on the local bourse weakened further last week. The headline FBM KLCI lost a cumulative 40 points to close at 1,748 last Friday. Last week’s losses tipped the benchmark index into negative territory, down 0.8%, for the year-to-date.

There is a confluence of reasons for the poor showing. This includes slowing economic growth and disappointing corporate earnings, drop in commodity prices and slow pace of reforms. In fact, many of these factors are common to the region.

However, although bellwether indices in Singapore, Indonesia and Thailand also ended in the red for the week, we appear to be faring the worst. The local bourse suffered intensified foreign selling, more so than any of our neighbours. Capital outflows in the past four weeks were the highest since January.

To be sure, Malaysia, as a net exporter of oil and gas, will suffer more from the steep fall in oil prices. The sector is one of the biggest contributors to government coffers. As such, the collapse in oil prices has set back targets to reduce the budget deficit and places a constraint on fiscal stimulus. Households and businesses also have to grapple with rising costs, post-GST.

But let’s be frank and acknowledge the elephant in the room. The widening 1MDB saga has, and will likely continue to, hog headlines. It hurts confidence.

Bank Negara governor Zeti Akhtar Aziz has assured that 1MDB does not pose a systemic risk to the country’s banking system. This is true. Equally undeniable though, is that it has immediate and longer-term repercussions.

In the past few days, we had a taste of its spillover impact on the equity market.

Shares for Tenaga Nasional, the second largest company by market capitalisation on  Bursa Malaysia, were buffeted on reports that it may have to acquire the power assets of debt-laden 1MDB — perhaps on less than favourable prices. The latter has intended to list its power arm to raise money to pare down the mountain of debts. The IPO, however, has suffered protracted delays. Alternatives are being bandied around.

If the speculations come to pass, the deal would raise questions over governance — and, no doubt, increase the risk for Corporate Malaysia in the eyes of investors.

Plus, it is a distraction — at a time the government needs to be fully focused on crucial reforms, if we are to achieve the high per capita income target as set out in the latest 11th Malaysia Plan.  

Importantly, the local bourse has always traded at premium valuations to our neighbours. A big portion of this price, that investors are willing to pay, is for political stability.

One has to ask if this premium is still intact or justified given the prevailing circumstances.

Is the current selloff a reflection of this premium being gradually whittled down — and valuations are falling to levels more in line with regional markets and more reflective of growth potential?

My basket of stocks fell, but by a lesser degree, relative to the broader market. Total value for my portfolio was down 1.8% for the week. By comparison, the FBM KLCI was down by 2.2%.

Last week’s losses pared total returns for my portfolio to 9.6% since inception. Nevertheless, I am still outperforming the benchmark index, which is down by 4.5% over the same period, by some distance.

This article first appeared in The Edge Malaysia Weekly, on June 1 - 7, 2015.

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