Malaysia: politics will light up this market

Democracy is on the march in Southeast Asia and optimism pervades the Malaysian stock market, says Lars Henriksson. Here, he explains how you could profit.

I had to do adouble take last Friday when I drove through the centre of George Town, Penang. I thought I'd stumbled into a carnival the streets were humming and the walls were thick with bright banners, flags and bunting. Then it hit me it's election season!

You can't escape politics around here at the moment. Like in the other Asean nations, democracy is getting bigger'. Politics is more inclusive and more open, and it's reforming very quickly.

An Asian spring' has begun to emerge. All across South East Asia there has been a clampdown on corruption, and more open and democratic voting. In 2012, the Myanmar government allowed the opposition leader, Aung San Suu Kyi, to contest in a by-election which she won. She later travelled overseas and promised more political reforms. Since then Myanmar, as part of the Mekong region, has become one of the hottest frontier markets.

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Malaysia, as part of the Asean 2015, is bound by agreements and has a growing important friendship with Singapore. Many investors are finally taking note. Today, I want to tell you why and how you could profit from from Malaysia's growth.

I think this election willinvigorate the Malaysian economy and the Malaysian market as has happened all over this region in recent years.

Malaysia prepares to go to the polls

There is a second election coming up as well. It will decide the leader of the nationalist United Malays National Organisation (UMNO) party. UMNO is the dominant political party and founding member of the Barisan Nasional coalition. So the next UMNO leader has a good chance of becoming prime minister, and will be decided by June.According to Morgan Stanley, both sides in this election support stronger domestic demand, foreign direct investment, better institutional standards (less corruption, in other words) and improved education standards. Where they differ is that the opposition would like to see a stronger focus on redistributing wealth. The opposition also advocates decentralisation from Kuala Lumpur to other regions.

The Asian spring

Malaysia is a constituent of a new Asian political spring. There are many factors behind this. But increasing prosperity, higher levels of education and access to alternative news via the internet all play important roles.

Malaysia is one of several Asian countries moving towards more open and inclusive politics. In 2010, Benigno S Aquino III became the 15th president of the Philippines, thanks to his focus on clamping down on both corruption and inflation. Since then, the Philippines stock market has been on a tear.

In 2011, Yingluck Shinawatra won a landslide victory and became Thailand's first female prime minister after the ousting of Prime Minister Abhisit Vejjajiva. Many feared that her populist policies would destabilise Thailand's economy. Those fears proved unfounded and the market soared.

Singapore's People's Action Party (PAP), which has been ruling the city-state since independence in 1965, had its worst election result in 2011. This was repeated in early 2013 when it lost a by-election, forcing it totackle voters' concerns about immigration and rising costs. The stock market has hardly registered any change, but Singapore has been very proactive in improving its relationship with Malaysia, as I've discussed before in The New World.

For the markets, politics matter

If the opposition were to win, it would entice even the most hardened critics to have a fresh look at the market. But even failing to do so, I think business-friendly policies will remain and the transformation agenda will continue to yield results.

The Malaysian market has for most of the time been in a big, fattrading range between 1,500 and 1,700 (13%).And at the same time the average price/earnings (p/e) for the market has dropped to 15.1 times below the five-year average of 17.1 times,according to Bloomberg.

This is hard to square with the reality. Return on equity (ROE) has risen from 18.6% in 2009 to 26.4% in 2012. Analysts believe that will rise to 33.1% in 2013 and 2014, according to Bloomberg.

Over the last five years, Malaysia has generated half of the annualised return (20.0%) of the Philippines and Thailand. Arguably they have seen more profound changes, but the gap looks excessive.

Previously we have suggested UEM Land and Bursa Malaysia. Another candidate is Sime Darby, whose principal activities include plantations, property development, heavy equipment and motor vehicle distribution, and energy and utilities. Sime trades on ap/e of15.4 timesthis fiscal yearand offers a dividend yield of 3.4%.

One potential fillip is ringgit appreciation. Since 2011, the currency has been locked in a trade range of 3.00 to 3.20 against the US dollar.If foreigners start to gobble up this market, it would lead to the double-whammy of rising stocks and astronger currency.

Interestingly, this has happened in Thailand where the Baht has just broken out from a tight trading range.This election could be just the catalyst the ringgit needs.

This article is taken from The New World, MoneyWeek's FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.

Lars is our resident emerging markets expert, with 17 years of 'on the ground' experience hunting down profit opportunities in Asia. Lars spent ten years living in Malaysia and Thailand, seeking out strategic opportunities, before moving to London to manage the Oracle Asia Absolute Fund. In short, Lars has real knowledge of where the opportunities in Asia are. Sign up to his free newsletter, The New World, here.