Why Mahathir's Malaysia is no financial fairy tale

The cliché that financial markets hate uncertainty holds true in Malaysia, with all circumstances considered.

As investors learnt the hard way in Pakistan, Russia, Qatar, Iran, South Africa, Lebanon and Brazil last year, political risk can eviscerate an emerging market bull run. Yet fairy tales are also created by political events, as the election of Mauricio Macri in Argentina or Narendra Modi in India attests. Frankly, I was stunned by the victory of 92-year-old Mahathir Mohammed, father of my Wharton classmate Mirzan, as prime minister in the recent Malaysian general election. I have never invested in Malaysia after a traumatic experience in the late-1990s and was aghast at systemic corruption in a de facto UNMO one party state.
Capital controls, ringgit bond market dominated by offshore funds and expensive domestic valuations made it impossible for me to buy Malaysian equities. My interest in Malaysia was Langkawi and Penang (Love Georgetown, won for the British Empire by Lord Cornwallis after the shame of Yorktown!), never the Bursa in Kuala Lumpur.
The defeat of Najib Razak and the Barisan Nacional coalition for the first time since independence in 1957 is a testament to the disgust the electorate feels at the $5 billion stolen in the 1MDB sovereign wealth fund, whose political and financial shock waves span the globe. It is a bad sign that the opposition victory did not trigger a buying wave in either Malaysian equities or the ringgit. Investors are obviously as clueless as I am about the next act in Southeast Asia's latest political soap opera. Of course, given the currency meltdowns on the Bosphorus and the Argie pampas, I am not exactly enthusiastic about owning emerging markets. When the US dollar, Libor and US Treasury bond yields all rise, property in emerging markets becomes a no-brainer short.
The cliché that financial markets hate uncertainty holds true in Malaysia. It is ironic that Mahathir Mohammed has emerged as the leader of bumiputera political revolt in Malaysia, given that he created the authoritarian state/crony capitalism culture as prime minister in the 1980s. Mahathir destroyed the political career and even personal reputation of his protégé and current ally Anwar Ibrahim. I was thrilled to meet Anwar at a CLSA investment conference in Bangkok and Asia's top fund managers gave him a standing ovation after he spoke passionately about reformasi. In the twilight of his life, Dr Mahathir wants to atone for jailing and libelling Anwar in 1998, the year George Soros led the speculative attack against the ringgit, baht, rupiah and won. Anwar will finally succeed Mahathir as the next prime minister of Malaysia, a political fairy tale that took me back to Benazir Bhutto's win in 1988 after a miserable decade of military dictatorship.
Dr Mahathir's economic populism is a source of risk. His promise to restore subsidies on gasoline and raise the minimum wage while promising to axe a 6 per cent GST tax will be a disaster for the Malaysian ringgit, under pressure by King Dollar and lower Chinese exports to the US in any case. This spells a sovereign credit downgrade to me. Mahathir has also targeted the multibillion dollar Chinese infrastructure projects Najeeb and his cronies so loved, since baksheesh from the Middle Kingdom is a sure path to riches in the Dragon Empire's vassal states. This will hit investor flows and pressure infrastructure stocks in the Kuala Lumpur Bursa. The new government has also targeted Najib Razak's foreign bank accounts, cronies and patronage networks. A political witch hunt of the Malaysian elite is not exactly a reassuring prospect to me. The 1MDB scandal has led to private bank closures, indictments and arrests in Switzerland, Singapore, the US and the Middle East. The return of the Jedi Council will mean protracted political, economic and diplomatic turmoil in Malaysia. It does not help that the Lim Eng, the next finance minister, was jailed twice by Mahathir when he was in power as prime minister. The latest rumour in Kuala Lumpur is that 17,000 cronies of Najib Razak will lose their grace and favour public jobs.
Malaysia has grossly underperformed Vietnam, Thailand and Indonesia, my preferred Southeast Asian stock markets. I doubt this changes until Anwar succeeds Dr Mahathir and unveils a non-populist economic blueprint. Malaysia is also an expensive emerging market at 17 times current earnings, 350 points above the MSCI emerging market valuation multiple. The latest US Iran sanctions will also hit Malaysia though $78 Brent benefits Southeast Asia's only crude oil exporter. For now, I limit my interest in Malaysia to Penang and Langkawi.
The writer is a global equities strategist and fund manager. He can be contacted at mateinkhalid09@gmail.com.