Investors are reacting cautiously as Malaysia embarks on its first political housecleaning in six decades, but analysts predict they'll find a growing number of reasons to warm to the country's stocks and bonds.
The opposition coalition, which unexpectedly bested a scandal-plagued United Malays National Organization last month, has pledged to root out rampant corruption and introduce greater checks and balances on government power.
Meanwhile, the new government's initial Cabinet appointments, which have looked beyond the country's politically dominant Malay majority to award key posts to ethnic Chinese- and Indian-Malaysians, suggest a more inclusive style of governance than the country has seen in decades.
If sustained, such a shift could eventually moderate a brain drain that has made Malaysia one of the world's most consistent net exporters of "clever people," noted a Singapore-based portfolio manager, who declined to be named.
For the moment, short-term hurdles loom larger in investors' minds than the potential payoffs from far-reaching reforms. Following the May 9 election, Malaysia's Kuala Lumpur Composite index tumbled as much as 7% over the latter half of the month — roughly twice the declines or more of Southeast Asian neighbors such as Indonesia, Singapore and Thailand. Since the start of June, Malaysian stocks have rebounded, together with global markets.
While the current moment could prove "a new dawn for Malaysia," investors are focusing on the "here and now," including how moves such as the cancellation of some big infrastructure projects with China could negatively affect growth, said Jayant Menon, lead economist in the economic research and regional cooperation department at the Manila, Philippines-based Asian Development Bank.
The new government acted quickly to honor its campaign pledges to do away with the unpopular 6% goods-and-services tax introduced in 2015 and revive fuel subsidies, moves that Moody's Investors Service termed credit negative.