With the dust slowly settling after Malaysia’s historic elections in May, investors are slowly focusing again on what matters most to them – the economic and financial data.

And the picture seems mixed on that front, or at least a little uncertain for now.

Esther Ong

Malaysia’s economy grew at its slowest annual pace since 2016 in the first quarter, expanding by 5.4%, according to central bank data. The new government has also moved quickly to implement its election campaign promise to scrap a goods and services tax, but it has yet to say what it will do to recoup the revenue that will be lost. 

An expected revenue decline may prompt the government to cut back on spending, while a review of infrastructure projects could slow construction, a key economic growth driver, according to experts. On the flip side, there is a widespread perception that corporate governance is likely to improve with the end of the old political regime.

In an interview with AsianInvestor last week, Esther Ong (pictured), chief investment officer for Prudential Malaysia, discussed how global investors view Malaysia, her expectations on the economic front and the challenges that smaller Malaysian institutions face in creating truly global multi-asset portfolios.

Q  Now that elections are out of the way, how do global investors perceive Malaysia?

It is still early to assess the implications given a complete picture of the government financials is yet to be provided. We should have a better picture once the budget for 2018-2019 is out later in the third quarter of this year.

While government revenues could be affected negatively by the replacement of the goods and services tax (GST) with the sales and services tax (SST), revenues could be compensated by: higher oil revenues or oil dividends; government savings via more targeted subsidies to low income groups rather than BR1M (a people’s aid programme) handouts; and government development expenditure being stretched over the years to average out the burden.

Having said that, the impact of lower development expenditure on growth has yet to be assessed given that development expenditure and construction/infrastructure spending has been one of the main drivers of economic growth.

On the plus side, corporate governance risk premia could improve given the new government motto of transparency and zero tolerance for corruption.

Q  What are the current opportunities and challenges for investing?

This year has been a volatile period for risky asset classes given the policy risks and [potential] trade war between China and US. Besides, bonds have also suffered the prevailing overhang of concerns from US monetary policy tightening and a phase of synchronised global growth shifting into unsynchronised monetary policy. This has resulted in negative returns in emerging markets.

For Malaysia, we have seen bond markets outperforming equity markets, which was not expected compared with expectations at the start of the year.

The Malaysian equity market, along with other emerging markets, recorded negative growth, with [share prices] falling by 6-7% year to date.

While the bond market suffered from bearish price movements as well, it didn’t fare too badly as bond yields seemed to have priced in the US rate hike.

Opportunities were also seen in global equities, primarily driven by a positive US equity market.

Alternative investments have also gained traction in recent years.

While these assets have usually shown a low correlation to stocks and bonds, the challenge is clearly that such assets are difficult to value, since they are typically more illiquid than traditional investments.

Regulatory restrictions and capital risk charges imposed on insurance institutions add to the hurdle rate for such alternative investments ... to be appealing despite the diversification benefits offered.

So, to justify the hurdle rate or return required on alternative investments and in consideration of the liquidity, private equity and hedge funds are often preferred.

Q  What are the challenges that smaller and mid-sized players face in creating multi-asset portfolios as opposed to larger players?

Smaller and mid-sized players do not have the economies of scale to have fully fledged teams and a global presence to make effective investment decisions.

Leveraging on international asset management companies via feeding into foreign funds would be the only practical way and allows companies to select funds that show good performance. Having said that, there are issues of access to fund offerings and [of the] accompanying high costs involved.

Q  What are the issues that Malaysian institutions face in terms of creating a global multi-asset portfolio?

One of the big challenges is that given that liabilities are Malaysian ringgit-denominated, any tactical asset allocation made using a global investment needs to be referenced to returns in Malaysian ringgit.

That means institutions need to develop a dynamic hedging process so the total portfolio management effect of diversifying into a different asset class is not offset by any currency fluctuations.

Q  What would you like to see from Malaysia’s new government to promote the insurance industry?

It would be helpful if we could assess the risk-return trade off of diversification into overseas or alternative investments in respect of the investments itself, without being constrained by a justification of the risk-return in respect to risk charges required.

Alternatives can generate returns at a lower risk or higher risk-adjusted returns. However, such investments may not be appealing when the return is assessed relative to the risk charges required to invest in these assets.