SINGAPORE (BLOOMBERG) - Asia's worst-performing major stock market is getting cheaper by the day. But that's not enough to lure investors back.
Malaysian equities aren't ripe for a re-rating even as valuations drop to near the lowest in a decade, according to investors. Political risks and a weak earnings outlook have undercut appetite for local shares, which are heading toward a second year of losses, extending 2018's worst showing since the global financial crisis.
"Malaysia remains an perennial underweight position for foreign investors," said Michiel van Voorst, chief investment officer for Asian equities at UBP Asset Management Asia. Local stocks have fallen substantially "but valuation without a catalyst is not enough. The profit cycle needs to improve on an incremental basis."
Global funds have yanked more than US$2 billion (S$2.7 billion) from Malaysian stocks in 2019, the biggest outflow among emerging Asian equity markets. More than a year after Prime Minister Mahathir Mohamad took office pledging to boost the stock market, investors have been left underwhelmed by a cut in public spending, a lackluster ringgit and question marks over the succession of power.
The FTSE Bursa Malaysia KLCI Index's 12-month forward earnings estimate has declined more than 12 per cent since the Pakatan Harapan coalition assumed power in May 2018, according to data compiled by Bloomberg. Business sentiment took a beating after the government shelved several large infrastructure projects and slashed spending to rein in its debt.
The share index's price-to-book valuation of 1.5 times is near the lowest since 2009 and at a discount to the 10-year average. The market is 4 per cent away from bear market levels.
To be sure, public finances may get a boost after Finance Minister Lim Guan Eng loosened the purse strings for next year's budget and the authorities stepped up efforts to recoup billions of dollars lost in the 1MDB scandal.
The efforts are not lost on investors. UBS Global Wealth Management remains overweight on Malaysian equities in its tactical asset allocation in Asia, according to equity strategist Lee Wen Ching who expects a potential improvement in earnings to boost stock prices.
But most money managers remain focused on the growth outlook, especially amid uncertainties about when -- and who -- will eventually succeed the 94-year old Mahathir.
Speculation about Mahathir's intention to honor a pledge to hand over to Anwar Ibrahim has dogged markets, with Minister of Economic Affairs Azmin Ali and Mukhriz Mahathir, the prime minister's son, said to be in the running for the role as well.
"The uncertainty on who will be the next prime minister and the little progress on government policy side doesn't make Malaysia stand out among other countries," said Ang Kok Heng, chief investment officer at Phillip Capital Management in Kuala Lumpur.
Sentiment toward Malaysian stocks has also been hurt by the weakening macro data. The economy expanded 4.4 per cent last quarter, the slowest pace in a year, while exports recorded the biggest slump since 2016 in September.
Global funds are on guard after FTSE Russell said it may drop Malaysia from its World Government Bond Index. The central bank has rolled out a series of initiatives to deepen onshore markets and the index provider is expected to provide its next update in March.
The benchmark equities gauge has fallen 14 per cent since May 2018 as investors await the outcome of government reforms in the electricity, telecommunication and construction sectors. The index slumped 5.9 per cent last year, its biggest annual decline in a decade.
The proposed regulatory changes "are still on review, so there is uncertainty as far as returns are concerned," said Mark Matthews, head of research Asia at Bank Julius Baer & Co. The regulatory overhang "needs to be removed" before stocks can move higher, he added.