Sep.24 -- Malaysia appeared poised for a new round of political turmoil after opposition leader Anwar Ibrahim claimed to have enough support from lawmakers to form a government. Gerald Ambrose, country head for Malaysia at Aberdeen Standard Investments, discusses what the turmoil means for the country's financial assets. He speaks on "Bloomberg Markets: Asia."
YVONNE MAN: Yesterday's announcement came as a bit of a surprise. If the government indeed has collapsed, what does this mean for Malaysian assets? Do they extend these losses?
GERALD AMBROSE: Yeah, it was a bit of a surprise, Yvonne. The effect on Malaysian assets has been pretty minimal, really. Politics in Malaysia seems to not really be about ideologies. It's about a rather sort of loose group of people who coalesce and then decoalesce. And Dato Seri Anwar's claim that he has a comfortable-- I think he said a formidable majority was a bit of a surprise. He has said it before on occasion saying that, I think back in 2012, by Independence Day I will have a majority, which never actually materialized.
As I say, these people tend to sort of-- it's all about people rather than philosophies. But the market seems to be rolling with it without really a problem.
YVONNE MAN: But we are entering, once again, into this period of political uncertainty, Gerald. Do you think the government can still push forward on economic reforms to boost growth?
GERALD AMBROSE: Yeah, well, we've been in a certain amount of flux since the beginning of this year, before coronavirus really arrived here, when Dr. Mahathir and Harapan, his coalition sort of faded away, and there was a bit of a coup, and Tan Sri-- or is it Dato Sri-- Tan Sri Muhyiddin Yassin took over with his Perikatan Nasional.
As far as economic measures are concerned, we're constrained more by not having a lot of money after the one MDB issue. And efforts to get the budget deficit back to around about 3 and 1/2% of GDP, it's probably going to blow up to about 7%, 8% this year, which is a lot less than the US at 24%, it looks like. But we don't have the ability or the reserve currency to-- to muck around and do weird experiments with our economy that the central banks in the Western world seem to have done. So I don't think a change of government will change policy that much as far as the economy's concerned.
- So Gerald, if markets can largely look through the political shenanigans that are unfolding in Kuala Lumpur, what are going to be the key factors, then, that investors should be looking at when it comes to the outlook for equities in Malaysia?
GERALD AMBROSE: Well, I suppose one thing we've got that most countries don't have, and that's, you know, a real return and relatively high interest rates. You know, you've-- on the equity market, you've got a number of companies with visible dividends giving them a yield at current prices of around about 4%.
The 10-year Malaysian Government Securities bond gives you about 2.7%. Inflation is negative more than 1%. So that's-- that's a decent return of 4% or 5% that you can get for stock. So that might be appealing to a lot of overseas investors. Having said that, foreign investors have sold something like $4 billion US worth of funds on a net basis over the past two years here in Malaysia.
So we're-- a bit of a rounding error at the moment as far as weightings are concerned in institutional indices. And the other area where there's growth, I think, is in the electronics manufacturing sector. You've got companies based around Penang, most of them, that manufacture for a number of the big players in mobile phones, smart phones, iPads.
The auto industry is growing very fast. The internet of things means that there's a lot more electronic products to be supplied. And these people are not just simple contract manufacturers. They are-- you know, they've got significant R&D. That's where the growth is in our portfolio. I think that's become a large part.
And everybody looks at Malaysia, and they think of rubber gloves. I just want to make the point that it hasn't been a price/earnings ratio expansion for these rubber glove manufacturers. They're cheaper now than they were at the end of the year-- at the beginning of this year if you look on a price to earnings ratio basis because the outlook looks so great with the average sale prices rising, volumes increasing, costs relatively stable.
So they're on around about 10 to 12 times next year's earnings. But of course next year could be just a bit of a one-off. And the share price of these stocks tends to move around on the likelihood of a vaccine at the moment. What else? I mean--
- A nod, there, then to-- a nod there, then, to Top Glove, Gerald. We have seen foreign investor outflows this year from Malaysia. To what extent are the retail flows that you say are picking up-- to what extent can the retail flows in Malaysia offset some of those foreign outflows?
GERALD AMBROSE: Well, they've more than offset them year to date. I mean, we're down, what, 7% here on the composite index as opposed to 20%-plus in the other ASEAN markets' benchmark indices. And that's partly driven by the glove manufacturers. But retail interest has returned to the market with this moratorium on loans that was initiated, I think, in April.
You don't have to pay installments on your mortgage, on your [INAUDIBLE] purchase, on your personal loan, on your SME debt, in some cases, until the end of September. Now, the prime minister did not extend that in his stimulus speech yesterday, but he did say that banks are speaking to their borrowers to find out if they need special help. And I think that something like a third of those that are currently enjoying the moratorium will be allowed to continue with that moratorium.
But that is a key factor for the retail market. You know, people are sitting at home or have been sitting at home. There hasn't been any English Premier League, and they haven't had a lot to do. So they've been playing the market. And it's great to see investors in the retail sector actually feel that they can make money out of the market. And some of them have significantly.
But they're now, what, about 40% of average daily turnover as opposed to 20% and below earlier. The big test is in a week. This time when the month ends and some people start paying installments on their mortgage, will they use the money they were paying the market with to pay that mortgage? So I think we might see retail die down a little bit.
YVONNE MAN: And you mentioned about how Malaysia is probably one of the places where you can actually get some yields and real high interest rates. The FTSE Russell decision, we're expecting that in the next 24 hours, Gerald. There is a chance that perhaps they may drop Malaysian bonds from their world indices.
Some are expecting outflows of as much as $5 billion at least. How much do you think this could dent foreign investors' appetite for Malaysian bonds?
GERALD AMBROSE: Well, it's pretty binary, I think. I don't know. Everybody seems to be estimating it. A lot of these are ETFs and passive investors. If FTSE decides to remove Malaysia, probably to the benefit of China, then there would be an outflow of $5 to $10 billion US. And that's the passive side.
It will affect things temporarily, just as, you know, every single quarter it seems that when there are reviews of indices, whether they're fixed income or equity here in Malaysia, we get a smaller slice of the pie. You know, when I came here in 1989, Malaysia was 26% of the Asia [INAUDIBLE] Equity Index. It's now 2.3%.