KUALA LUMPUR: Stock market investors may be bracing for short term pain amid heightened uncertainty before heading for long term gains.
Bonds and ringgit may also come under pressure in the short term, impacted by the elections results, which sided Pakatan Harapan (PH) to form a new government.
Analysts are carefully monitoring the current developments in the local political scene that may affect market sentiment amid change in power.
Standard Chartered (SC) said the market may be concerned about loosening of fiscal policy, as suggested in the new government’s 100-day election manifesto, but this situation can be moderated by mitigating fiscal measures, such as cutting expenditure in some areas.
There may be some near-term policy uncertainty, but concerns may fade with clarity from new government, SC said.
The bank said Malaysian investment grade corporate bond spreads may remain under pressure near-term and it believes the 1Malaysia Development Bhd (1MDB) bonds may be impacted by the election results.
"Short-term uncertainty may also lead to a knee-jerk reaction in ringgit rates. In the meantime, cautious sentiment may drive investors to adjust positioning amid heavy long-end supply of Malaysia Government Securities (MGS) and government investment issues in the next two months: 10Y, 20Y and 30Y MGS and 10Y and 15Y government investment issue (GII) will be issued,” it added.
Prime minister Dr Mahathir Mohamad on Thursday reassured investors that the new government will boost Malaysia’s stock market and economic growth in his first remarks as the seventh Prime Minister.
He is making stock market and economic stability the main priorities by seeking ways to nurture a more active stock market, increase market capitalisation, create more friendly ties with other countries as well as ensure a stronger ringgit.
Moody’s Investors Service Financial Institutions Group vice president and senior analyst Simon Chen said market dynamics will take time to unfold and a lot will depend on what the new government unveils in the coming weeks and months.
If investor sentiment worsens materially, he said increasing risks of capital outflows and a further weakening of the ringgit, that could in turn dampen private sector consumption and operating conditions for banks in Malaysia.
“Capital outflows could also lead to deposit outflows and a tightening of liquidity conditions in the banking sector. However, we acknowledge that the system has weathered challenging periods, in particular, during the 1MDB allegations,” Chen said.
Fitch Ratings said PH victory and its policy platform indicates a much greater potential for change, including proposals to roll back tax and subsidy reforms as part of a 100-day fiscal plan.
The credit ratings provider said Malaysia's growth momentum remains strong and is a key factor underpinning its rating.
“We continue to forecast for average growth to exceed the 'A' median, though policy uncertainty and resulting market volatility may lead to some short-term headwinds,” it said.
CIMB Investment Bank said foreign investors may reduce their weighting in Malaysia due to short-term uncertainties.
“As such, banking stocks that have never seen foreign inflows in recent months may be negatively impacted. Constructions sector too will be negatively impacted as big projects may be reviewed,” the research house said.
“Consumer stocks however could gain from potential goods and services tax abolishment and minimum wage hike. Exporters may also gain due to their limited exposure to the domestic market,” it said.
Stock market analyst Nazarry Rosli said the market which is the barometer and yardstick to the general health of the economy and well-being of a country, will reflect the fundamental of the economy again in the long term.
“Therefore, the stock market will rise back in the long term after going through some short-term headwinds,” he said.