Why Malaysia may have hit bottom
Malaysia's hard-hit stock market is getting a less-than-ringing endorsement with one of the world's leading lenders telling investors that things aren't likely to get any worse.
"There have been numerous globally attention-grabbing headlines on Malaysia this year, which we believe have increased political uncertainty and risk in investing in Malaysia," analysts at Deutsche Bank said in a note Monday.
"However, going forward, we do not expect this to increase."
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Shares in Malaysia have been hit hard over the year so far: The KLCI is down around 4.4 percent year-to-date, after trading down as much as 13 percent at its mid-August lows. Foreign investors have sold a net 17.6 billion ringgit ($4.11 billion) worth of Malaysian equities so far this year, according to data from Maybank Kim Eng.
Meanwhile its currency, the ringgit, has hit levels seen since the 1998 Asian Financial Crisis and lost as much as 28 percent of its value against the U.S. dollar from the beginning of the year through the end of September. It has, however, recovered around 4.5 percent since then.
Malaysia's shares and currency have been hit with a toxic brew of declines in the prices of its commodity exports, especially palm oil and crude oil, as well as what may be the country's worst-ever political scandal, which has spurred protests calling for the removal of the prime minister from power.
"Our base-case assumption is status quo: the Prime Minister and (ruling coalition parties) Barisan Nasional remain in power until the next general election in 2018," Deutsche Bank said.
"With no change in this position, corporate Malaysia continues as usual, albeit with weaker consumer sentiment and a weaker currency."
While it is not exactly full praise for the country, Deutsche Bank doesn't see much risk that shares will fall further, in part because investors are "overwhelmingly underweight" on the market.
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Indeed, Bank of America Merrill Lynch's October survey of fund managers showed that more than 10 percent of fund managers were underweight Malaysia, but that was down from a net of around 25 percent underweight in September.
Nonetheless, Deutsche Bank noted that it was only cautiously optimistic: "Now seems a good time to move positions closer to neutral," it said.
For one thing, the concerns over the decline in crude oil prices may be overdone, it said, adding that the economy is still resilient and Malaysia is likely to maintain a trade surplus as demand for imports is also softening along with exports.
Also, even though falling oil prices will hit government revenue, a new goods and services tax is set to help make up the shortfall, Deutsche Bank noted.
The government forecasts the economy will grow 4.5-5.5 percent this year, although expectations are for the figure to come at the low end of the range, in danger of its slowest growth since 2009, during the Global Financial Crisis, when the economy contracted.
The political situation may be stickier, but Deutsche Bank tips a potential for a relief rally if that uncertainty is reduced.
The current scandal may be the country's worst yet, with Prime Minister Najib Razak facing increasing political pressure -- including large protests in August calling for his ouster and opposition parties filing last month to hold a parliamentary no-confidence vote; it isn't clear when the vote would be held.
The scandal surrounding the government is due to one of Najib's pet projects, the 1Malaysia Development Berhad (1MDB) fund, launched in 2008 to promote economic development. It has been in the limelight for months, amid allegations of false auditing, huge debt and, more recently, financial fraud. In July, the Wall Street Journal published a report alleging nearly $700 million flowed from the fund to Najib's personal bank account.
Najib has repeatedly denied any wrongdoing, claiming the funds were a private donation from Middle Eastern country he has declined to name. Singapore and Switzerland have both suspended bank accounts tied to 1MDB and in the U.S., media reports said the Federal Bureau of Investigation (FBI) is investigating as well.
Investigations in Malaysia have been dogged by accusations they were biased toward the government or halted entirely.
The scandal returned to the front page again Tuesday, when The Wall Street Journal reported that an Australian fund management firm currently being wound down, Avestra Asset Management, had a key role in managing $2.32 billion for 1MDB.
The Deutsche Bank note, published before the latest news, had indicated that the noise quieted somewhat. The bank declined to comment on whether the latest news changed its view on the market. Stocks don't appear to have been badly hit by the latest news, with the KLCI rising around 0.4 percent in early trade.
"The situation is certainly much better than when the ringgit was depreciating every week, (amid) almost daily news flow on 1MDB/politics and large street demonstrations," it said in the note. There's another reason it's not a bad time to enter Malaysia's market: "the MSCI Malaysia has historically seen a year-end rally."