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Economy

Good market story could lag Malaysia’s ‘good country story’ for years to come

Aberdeen Standard Investments (Asia)’s Gerald Ambrose

The push to build a vibrant, private sector-led economy on a foundation where government connections had been key to business success will benefit Malaysia — eventually. But the transition won't be quick or smooth for investors in Kuala Lumpur-listed stocks.

Malaysia has "a very good country story to tell" but not a great market story at present, and it could take considerable time before the two are synchronized, said Stephen Hagger, Credit Suisse's Kuala Lumpur-based head of equities and country head, Malaysia.

A fresh government pursuing a new way of running the economy, with less pump-priming and greater dependence on a private sector focusing on value-added industries that can offer better wages — that's a long-term story for Malaysia that could see the country "breaking out of this middle-income trap," said Gerald Ambrose, head of Malaysian operations and portfolio manager at Aberdeen Standard Investments (Asia) Ltd. in Kuala Lumpur.

But inevitably that quest involves dismantling the old way of doing business before a new engine of growth can be put in place, making for a bumpy ride.

For example, the new government's decision to review or cancel a number of costly infrastructure projects teed up by its predecessor has weighed on the market, inflicting particular pain on sectors such as construction stocks.

The change of government has also led to new leadership at some of the biggest government-linked investment companies — including the 833.8 billion ringgit ($202.6 billion) Employees Provident Fund and Khazanah Nasional Berhad, the country's 136 billion ringgit strategic investment arm — accompanied by signs of change in the way their influence is being felt in the market now.

Those government-linked investment companies have been dominant players in the market, accounting for at least half of daily turnover, and were often seen stepping in to buy when markets were soft or selling into rallies, market veterans say. But this year, those heavyweights — after being pressured by Prime Minister Najib Razak in recent years to support the ringgit by repatriating some of their overseas investments — seem more focused on adding offshore assets again than on padding their holdings of domestic stocks.

Khazanah — which had previously focused on investments in strategically important sectors of Malaysia's economy — announced in March a "refreshed" government mandate that would see roughly 30% of its portfolio remain in strategic sectors while the other 70% is transitioned to a "commercial fund" invested in a globally diversified mix of assets.

"In 10 years, Malaysia ends up being in a far better place" but to get there Malaysian businesses need to re-engineer themselves to emerge from an era marked by the heavy involvement of politics in business, Mr. Hagger said. That will require a shift in focus to "know-how" from "know-who," he said.

Mr. Ambrose said there are signs the transition has become "too stressful" of late, and government announcements in recent weeks about restoring some big infrastructure projects, albeit after scaling back their size and cost, suggest the government believes some pump-priming is needed to get by for now.