Analysts say the outlook for Malaysia’s stock market, which slumped 7% in the first half, remains cloudy, as central bank tightening, a weakening currency and other concerns sap investor appetite for shares.

The FBM KLCI, Malaysia’s benchmark stock index, closed down 0.19% at 1,389.90 on Wednesday. It has traded below the 1,400-level since June, after nearly hitting 1,500 in January. Combined reported earnings of Bursa Malaysia’s 30 largest companies fell about 35% in the first quarter this year compared with the final three months of 2022. The stock market saw foreign outflows of 4.19 billion ringgit ($903 million) in the first half of 2023 amid lack of growth catalysts and a weakening trade sector.

Factors cited for the weak performance also include dissatisfaction with government economic policy and political uncertainty ahead of state elections next month that could buffet Prime Minister Anwar Ibrahim’s government formed in November.

Stock markets often take a hit when interest rates are on the upswing as investors seek higher yields in the bond market. Nur Ain Shahrier, an assistant professor of economics at Sunway University, said Malaysia is no exception.

Bank Negara Malaysia, the central bank, announced an unexpected rise in its benchmark overnight policy rate (OPR) in May, lifting the rate a quarter point to 3.0%, citing “stronger than expected” economic growth. Inflation continued to ease to 2.8% in the same month, versus 3.3% in April.

“A rise in the interest rate will hinder the borrowing and lending activities between the businesses and banks, as they have to pay higher interest for the loans they are taking,” Shahrier said, adding that investors will seek higher yields in bonds.

The central bank holds it next policy meeting on Thursday and analysts are largely expecting it to hold steady amid lingering downside risks and slowing consumption.

But Firdaos Rosli, chief economist at Bank Islam, says another hike of 0.25 percentage point remains a possibility by the end of this year.

“In the event Bank Negara tightens ahead, it could be a defensive move against excessive weakening of ringgit, to bring down core inflation and to manage a better-than-expected private consumption growth,” Firdaos said, adding that inflation is expected to average 3% this year.

On the political front, elections in Penang, Kedah, Kelantan, Terengganu, Selangor and Negeri Sembilan — six of Malaysia’s 13 states — are seen as important because the results are likely to affect the stability of the federal government and the direction of the national economy if Anwar loses support.

Anwar cobbled together a national “unity government” made up of coalitions after his Pakatan Harapan alliance fell short of a majority in parliament. Although he enjoys two-thirds majority support in Parliament, opposition groups are keen to topple his administration, raising concerns over its long-term viability.

Mounting speculation over the exact timing of the elections came to an end on Wednesday when Malaysia’s Election Commission announced they will be held on Aug. 12.

Arinah Najwa, director at Bower Group Asia, a regional advisory group, said consumer demand is expected to cool, given political and economic uncertainties in Malaysia, as consumers face higher borrowing costs, while as cuts to subsidies mean higher electricity costs by year end for higher income earners.

Besides politics, “The situation is compounded further by the fact that Malaysians are running out of savings in their retirement funds,” she added. “Currently, the number of Employees’ Provident Fund account holders who had less than 10,000 ringgit rose to 6.7 million from 4.7 million people in 2022.”

Still, not all the signs are bad for Malaysia’s economy. First quarter gross domestic product came in better than expected, expanding 5.6%, year on year, and outperforming regional peers. But the ringgit’s weakness against the dollar continues. The U.S. currency traded at 4.24 ringgit in early February but has strengthened to about 4.66 in the first week of July, an increase of about 10% for the greenback.

As a historical benchmark, the ringgit weakened to 4.88 during the Asian financial crisis a quarter century ago.

Sunway University’s Shahrier pinned this year’s bout of ringgit weakness on a lack of effective government polices “addressing long-term structural issues,” adding, “Good and forward-looking governance can restore the confidence of investors towards the country’s economy.”

A weak currency can be attractive for foreign stock investors if they are confident in a country’s economic outlook and policies. Shahrier cited Japan’s Nikkei Stock Average recently hitting 33-year highs. That has come as the yen slips against the dollar, helping make Japanese stocks cheaper and more attractive to foreign investors.

Anwar, the prime minister, has not stood still on the stock market. Last month he announced a reduction of the stamp duty on shares traded on the Bursa Malaysia from 0.15% to 0.10% of contract value, effective this month, to reduce the cost of trading securities and stimulate the market. And there were 20 initial public offerings on the Bursa Malaysia in the first half of the year.

MIDF Research thinks the local market can pick up momentum if international funds pour into Southeast Asian shares in response to fewer rate hikes by the U.S. Federal Reserve. Its target for the FBM KLCI is for the index to end the year at 1,540.

Source : Nikkei

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