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Populism Reappears in Malaysia

June 4, 2018 | Multi-Asset


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Malaysia's recent election reminds the market that global populism—while less intense—is not dormant. Compared to developed countries in the West, we've had a lot of political stability in Asia, as these countries' regimes tend to be a bit more authoritative.

Before I discuss the potential investment implications of the Malaysian election, I'll provide some context in the region and Malaysia specifically. The big three countries in Asia have very stable political leaders, with Xi Jinping in China, Shinzo Abe in Japan, and Narendra Modi in India.

But, on our radar are a few smaller, less influential countries and players within the Asia game theater where we've been anticipating potential elections this year.

Pakistan's election, for example, is expected later this year, and Thailand was expected to hold an election in 2018, but it appears it's pushed into at least 2019.

We expected that Malaysia would hold an election no later than August, and several weeks ago Prime Minister Datuk Sri Najib Razak triggered a snap election, which took place in early May.

Despite being very unpopular, Najib was the heavy favorite, given the long-standing base of support for the Barisan Nasional (or National Front) party, the very short election cycle, and a weekday election date designed to suppress turnout. But the opposition coalition led by former Prime Minister Mahathir Mohamad, the heavy underdog, won.

In terms of policies, I believe there's a potential yin and yang impact.

Here's a breakdown of the game theater players and the potential investment implications.

The Parties

  • The National Front is a long-standing coalition—about 60 years—of center-right parties. It's the pro-ethnic Malaysian party.
  • The Pakatan Harapan (or Party of Hope)—the opposition in this case—is a coalition of left- and center-leaning parties.
  • The Malaysian Islamic Party is the third coalition, typically supported by the conservative rural populations.

The Players

  • Najib, who has been the prime minister for nearly a decade, was seeking a third consecutive term. He's been involved in the state investment fund 1MDB embezzlement scandal tied to his personal bank.
  • Mahathir is nearly 93 years old and a former prime minister. The potential plan is to hand power over to Anwar Ibrahim, a former deputy prime minister and finance minister who's currently in jail.

The Results

Political powers have shifted significantly. There are a total of 222 parliamentary seats, so 112 seats are needed for simple majority.

  • The Party of Hope won 122 seats, well above a simple majority—significantly up from its previous 74 seats.
  • The National Front influence went significantly down to 79 seats from 129.

The Investment Implications

Immediately after the election, Malaysian equity markets sold off by about four percentage points, and the country's currency (the ringgit) market dropped by two percentage points. But I think this event creates more of a challenge for the short term than the long term.

In terms of policies, I believe there's a potential yin and yang impact. The opposition coalition appears a bit less friendly to business and trade, and is more focused on social spending.

There's potential for it to increase the minimum wage and reintroduce subsidies on petroleum products, which increases fiscal risks. Regarding trade, the opposition coalition is less favorable toward the Trans-Pacific Partnership.

On the positive side, the new government provides a check and balance to existing institutions. The same coalition has been in power for 60-plus years, largely unchecked. For instance, the elections were very gerrymandered, which is just one example of where some of the citizens' freedoms have been curtailed.

Going forward, the market will likely focus on whether the new government will initially follow through on its election promises. A lot of these campaign promises are fiscally challenging, so we'll see if they are watered down a bit.

Also, a peaceful transition is important, and I think the opposition's substantial victory is helping to create an environment for a peaceful hand over of power. We'll also be closely watching in the early days for continued central bank independence.

As far as our portfolio exposures, we continue to be slightly long in Malaysia, both on the equity and currency side.

In 2017, we were generally above fundamental value signals across Asian markets. In late 2017 and into 2018, we changed our Asian equity exposure—including in Malaysia—to be below fundamental signals.

On the currency side, we've maintained a long position. In aggregate, we're slightly above value signals on the currency side, and slightly below on the equity side.

Bottom line: We'll continue to watch for populism flare ups to assess opportunities and risks.

Aaron Balsam, CFA, is a senior analyst on William Blair's Dynamic Allocation Strategies team.