Malaysia’s stock market hasn’t done much in a long time. Is that ready to change?

Low commodity prices, political scandal and a weak currency have kept investors away. The country’s stock market, the Kuala Lumpur Composite Index (KLCI), hasn’t delivered much, although it’s not had a major correction since late 2008. In 2016, it was down 3 percent (while the MSCI Asia ex-Japan index was up 3 percent). Over the past five years, it’s up 10 percent (compared to MSCI Asia ex Japan’s 16 percent).

In recent years, political scandals have rocked the country after it was revealed that billions of dollars were allegedly misappropriated from state development fund 1Malaysia Development Berhad (1MDB).

The scandal played a big role in keeping global investors away from Malaysian markets. The nation’s currency, the ringgit, suffered from a pronounced loss of investor confidence stemming from 1MDB, falling nearly 15 percent against the dollar since the scandal broke in mid-2015.

Malaysia also suffered (along with other emerging markets) after the U.S. began raising interest rates in December 2015. The Federal Reserve’s action triggered a redirection of global funds away from emerging economies and back to the U.S., where investors could earn higher returns.

And the collapse of oil prices in 2014 made the situation much worse, sending the ringgit into a dramatic plunge.

Turning around now

But things are now turning around for Malaysia. The benchmark FTSE Bursa Malaysia KLCI equity index, which tracks the stock price performance of the 30 largest companies on the Malaysian stock exchange, has seen gains of almost 8 percent this year so far. And it recently closed at its highest level since August 2015.

 

So what’s behind the turnaround? Foreign investor interest in Malaysian stocks has certainly helped. After a three-year run during which they withdrew US$7.7 billion, global investors invested more than US$1 billion into Malaysian equities in March alone (and US$1.3 billion in total during the first quarter). Although this eased slightly in April, the trend is still positive.

Then there’s the turnaround in corporate earnings, which saw an 8 percent increase in 2016. For the first time since June 2012, more companies have upgraded their 12-month forward earnings per share estimates, than have downgraded them. Strong earnings are essential to the rising share prices. And estimates now suggest that earnings will continue to strengthen.

Higher export-led growth on the horizon

Malaysia’s economic growth forecasts are also improving, thanks to expected strong export growth. Malaysia’s exports fell 8.6 percent year-on-year in October. But since then, they’ve risen consistently.

This turnaround was partly down to renewed strength in the electrical and electronics sector, which accounts for over one-third of Malaysia’s total exports. Higher commodity prices (Malaysia is a major oil exporter and the world’s second-biggest palm oil exporter) are also helping. The Asian Development Bank forecasts GDP growth of 4.4 percent this year, and 4.8 percent next year. That’s down from 5 percent in 2016 but is better than earlier expectations.

The worst is over for the ringgit

The ringgit lost over 5 percent against the dollar between October and March. That comes after it hit a 19-year low in January.

To try to stop the ringgit’s fall, last year Malaysia’s central bank tried to limit some types of trading in the currency. Spooked by the potential for currency and other controls, foreign investors sold Malaysian shares and bonds – therefore pushing the ringgit down further.

The central bank subsequently amended the changes, and as a result, the ringgit has clawed back some of its losses this year. It traded at 5-month highs recently. These stabilising measures suggest the worst is over for the ringgit.

Finally, the country is due to hold an election in the coming months. Though big changes in terms of politics or policy are unlikely, the good news – for markets – is that the government usually boosts spending in the run-up to election season. This supports the economy and corporate earnings. In the past, the Malaysian stock market has moved up strongly prior to election season.

It’s not all roses

U.S. President Donald Trump’s trade policies (which we wrote about here) could spell bad news for Malaysia if he follows through on threats of a trade war with China – and possibly other countries that have a trade surplus with the U.S.Also, the U.S. Federal Reserve’s actions on U.S. interest rates will have an

Also, the U.S. Federal Reserve’s actions on U.S. interest rates will have an important impact on Malaysia’s currency, and the stock market. Increases in U.S. interest rates are generally bad for emerging markets, as money tends to flow out of them and towards dollar-denominated assets that are perceived as safer and can offer increasing yield.

The 1MDB issue will continue to rumble on, with multiple investigations ongoing. But it seems that, in terms of its impact on markets, the worst is over, as we mentioned back in December. And very recently, it was reported that 1MDB had reached an agreement on repaying bonds it had issued that had led to the development fund being in default 12 months ago.

However, Malaysian shares aren’t particularly cheap. The country’s stock market is trading at a forward price-to-earnings ratio of 16.6. That compares to 13.2 for the MSCI Asia ex-Japan index, and 14.8 for the Singapore stock market. While this could fall if earnings improve, that Malaysian shares aren’t cheap puts a cap on how much the market can rally.

Additionally, the 1MDB scandal – and corruption generally – will dampen investor enthusiasm, even if the ringgit is more stable and economic growth is steady. While Malaysia’s stock market might enjoy an election–related boost, don’t count on it to last. In the Churchouse Letter in coming months, we’ll be exploring markets that offer better prospects.

If you disagree, and believe in Malaysia stock market, investing in is easy through ETFs. The db x-trackers MSCI Malaysia Index UCITS ETF (Singapore Stock Exchange; ticker: LG6); the Lyxor MSCI Malaysia UCITS ETF (London Stock Exchange; Ticker: MALL); the XIE Shares Malaysia ETF (Hong Kong Stock Exchange; ticker: 3029), which tracks the KLCI Index, and the iShares MSCI Malaysia ETF (NYSE; ticker: EWM) are all viable options.

This is a guest post by Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world. Click here to sign up to receive the Asia Wealth Investment Daily in your inbox every day, for free.

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