In the past four years, Malaysia has gone through its fair share of problems: the commodities sell-off hurt exports and led to a decline in the country’s current account surplus; the woes of the 1MDB scandal caused investors to lose confidence in the country, leading to capital flight; and, after 2013, the Federal Reserve signaled a tightening bias to monetary policy.
These three events contributed to a significant weakening of the currency (approximately 35%) against the dollar. Meanwhile, economic conditions became harsher. Corporate profitability, as well as consumer disposable incomes, stagnated or declined. Under pressure from ratings agencies to control the budget deficit, the government was forced to cut back on several subsidies. Consumer prices for electricity, LGP, petrol/diesel and sugar, amongst others, were raised significantly. And, in April 2015, a 6% goods and services tax (GST) was introduced for the first time. With a depreciating currency, inflation rose. The result was a big squeeze in consumers’ disposable incomes, while businesses saw a sharp rise in costs.
Despite these clouds I see some silver linings. China has, in my view, taken advantage of the economic situation in Malaysia. Assisting Malaysia has a geo-political angle, helping China win over one more Asian country in its quest to dominate its perceived sphere of influence. As part of the ‘one belt, one road’ initiative, China is looking to deepen ports (Malacca), build new ones (Penang and Tanjung Pelepas), construct several roads, new rail lines, bridges and industrial parks. A few property companies from the mainland have bought large swathes of land in Johor to build new homes. Some reports suggest China will over the next five years, invest $150bn in Malaysia while committing to import $2trn worth of goods and services from Malaysia. These numbers sound gigantic. It would be naïve to take them at face value, yet the trend is unmistakable. Besides investments, the weaker ringgit has made Malaysia a very attractive holiday destination for Chinese tourists. One of the companies we own in our portfolio, Genting Malaysia, is in the process of completing a theme park in association with 20th Century Fox. Naturally, there is a simultaneous massive expansion of an existing casino next door, just in case the cheap ringgit does not do the job to rope them in.
The purging of excesses
I have no illusions as to why the Malaysian stock market has been a laggard. Valuations of several stocks in Malaysia are cheap for very compelling reasons. Unlike in South Korea, we have not witnessed an earnings upgrade cycle. Unlike in China, there are no internet plays, nor is the consumer market massive. And unlike in India, the GST levy isn’t touted to be the elixir that justifies sky-high valuations because of an impending structural change. There is a price to pay for having no hype. Yet, turned on its head, cheap valuations for investors with patience are a boon.
I can’t say for sure what could or will change in Malaysia. But experience suggests that when a country’s currency sells off, it is the first sign of the purging of excesses. Consumers and businesses have dealt with higher costs for the past 3-4 years. Like any economic participant across the world, they start to adopt and change behaviours to contend with tougher economic conditions. Things don’t stay in the dumps for too long. As China starts to inject capital through direct investment and tourists recognise Malaysia for the bargain it has become, could these be the sparks that ignite investor interest?
Samir Mehta, JOHCM Asia ex Japan Fund
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