The truth behind Malaysia’s stock market rally

The recent stock market rally, even as the country grapples with political and economic uncertainty, could be a reflection of the positive forecasts for Asian markets with strong support from oil and technology stocks.

The Kuala Lumpur Composite Index (KLCI) has rallied higher for five straight sessions, gaining more than 80 points.

It now trends above the 1,565 resistance point and is looking positive for investors.

But while some politicians attribute this to the change in leadership, the truth is perhaps much further.

As a crude petroleum exporter, Malaysia’s financial markets are greatly influenced by oil prices.

Oil has been back on the upswing, with the global benchmark price climbing above US$70 a barrel, leading to positive sentiment in the local bourse.

In addition, there is increasing confidence in the supply-demand picture, keeping prices aloft and boosting investor confidence.

For much of the past two years, crude petroleum has moved on two factors: the spread of Covid-19 and the decisions of Opec and its allies about whether to increase or decrease production.

But the current rally hardly makes up for the years of outflow and losses incurred.

Malaysia’s stock market has logged an astounding 25 straight months of outflow and lags against regional peers, falling 8% so far this year while benchmarks in Indonesia, Thailand and Singapore have gained roughly 1%, 5% and 11% respectively.

The country’s economic slowdown over the past decade can be narrowed down to a few key points, namely the 1MDB fiasco, the ensuing political instability, Covid-19 and poor government policies.

The role of the 1MDB scandal is evident from the correlation between the outflow of foreign funds and the change in FBM KLCI between 2014 and 2020.

But there is also the question of the perception of political stability, especially after the outbreak of Covid-19.

From the start, the government had been forced to fight the pandemic while struggling to survive successive campaigns to topple it amid its razor thin majority.

There are also questions about whether the current KLCI rally is the turnaround widely hoped for, or merely sentiment-driven.

Foreigners hold an estimated 40% of Malaysia’s sovereign debt, so investors’ perception matters.

Foreign money has been flowing out of the country as the pandemic and political instability delayed economic planning and stalled attempts at institutional reforms.

Prime Minister Ismail Sabri Yaakob’s move to reach out to his opposition, while it will give some semblance of political stability, is unlikely to change the market perception that the country’s political landscape will remain fractured, with policy uncertainties set to remain a problem.

For the time being, a new prime minister can do little to ensure political stability.

Whether Malaysia’s financial market rally can be sustained is yet to be seen, but it would be superficial to attribute it to a change in government, for example, when the factors that contribute to past political uncertainties are still at play.

The good news however is in the successful vaccination campaign. With herd immunity soon within reach, economic sectors will start looking up again.