Malaysian stock market braces for turbulence as budget looms

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KUALA LUMPUR (Oct 11): Five months after the surprise election win by Prime Minister Tun Dr Mahathir Mohamad, investors in Malaysia’s stock market may finally be coming to grips that there will be more pain before any gain in the months ahead.

Volatility in Malaysian stocks jumped to its highest since June and the FTSE Bursa Malaysia KLCI Index extended its decline by another 2.6% on Thursday following a 2.2% plunge the previous day. That’s after Dr Mahathir said at an Oct 9 forum that the government will devise new taxes soon to shore up a state budget that’s been constrained by debt and changes to the consumption levy.

“There’s some uncertainty around policy changes from the government that can lead the market to be volatile in the near term,” said Ivy Ng Lee Fang, head of Malaysia research at CIMB Investment Bank Bhd in Kuala Lumpur. “These are not new as the government has given the same guidance before,” she said.

More than 1,200 bankers and investors from at least ten countries filled the ‘Malaysia: A New Dawn’ forum in Kuala Lumpur on Tuesday to gain clarity on the government’s plans. The crowd flowed beyond doorways, and many were left standing due to insufficient seats during the morning address by Dr Mahathir, Finance Minister Lim Guan Eng, and Bank Negara Governor Datuk Nor Shamsiah Mohd Yunus. The sessions that followed, hosted by ministers and industry leaders, were equally crammed, forcing staff to bar entry to latecomers.

Investors sentiment may have been “dampened” after Dr Mahathir and some ministers from his cabinet “met the investment community yesterday,” said Bernard Ching, head of Malaysia research at AllianceDBS Research Sdn Bhd. “The message that got across to the investment community is not to expect any goodies,” he said.

Malaysia’s benchmark index is in the steepest two-day decline since October 2008. It fell into a correction in June as overseas investors fled the nation’s market after a surprise win by Dr Mahathir in May. Foreign outflows have hit US$2.2 billion this year after stock flows turned negative shortly following the change in government, according to data compiled by Bloomberg.

What’s next for investors? The government’s 2019 budget on Nov 2 may provide a more concrete and definitive idea of what the market should expect. The new tax measures will be announced as part of the budget speech, Finance Minister Lim said at the forum.

That budget “will have significant implications for the market, given fiscal constraints and the ideas being floated on new sources of revenue,” RHB Research Institute analyst Alexander Chia said in a note.

Dr Mahathir will also unveil new social economic policies on Oct 18 when he tables the mid-term review of the 11th Malaysia Plan for development. Some investors may be staying on the sidelines and holding cash ahead of that announcement, amid rising political uncertainties and the government’s plans to introduce new taxes, said Margaret Yang, a strategist at CMC Markets Singapore Pte.

Tony Pua, political secretary to the Finance Minister, told Bloomberg that the stock market is currently “adjusting and reprioritizing.” Wednesday’s plunge is temporary and the market will recover soon, he added.

CIMB recommends Dialog Group Bhd, Genting Bhd and Westports Holdings Bhd as “defensive plays,” while AllianceDBS prefers companies that don’t rely on government contracts, especially exporters like glove producers, even if those may face risks from the US-China trade war, Ching said.

“It’s unclear how low the market can go,” he said. “All I can say is that the market will enter a period of uncertainty until the budget 2019 announcement.”

For some, now may the time to stay cautious. “Less spending from the government and higher taxes from the private sector is getting discounted in the markets,” said Geoffrey Ng, director of Fortress Capital Asset Management Sdn Bhd. “Some investors will take money off the table and some will delay fresh investments.”