All eyes on Malaysia

Date: May 14, 2018

  • The Malaysian general election provided the main focal point;
  • Local energy stocks in play as oil touched US$77 per barrel after the US withdrew from its Iran nuclear deal;
  • The US 10-year Treasury yield crossed 3% on Wednesday;
  • Strength of US dollar puzzles analysts;
  • SGX regulators order VARD to hold EGM again

The Malaysian election

Malaysia’s general election on Wednesday 9 May was a close-fought affair with the Opposition led by former prime minister Mahathir Mohamad pulling off a shock victory over the ruling Barisan Nasional (BN) coalition.

It remains to be seen how investors react to the result given widespread expectations that BN would emerge victorious. The Malaysian market was closed on Thursday and Friday. Most observers expect some knee-jerk selling on Monday in Malaysia, largely because investors don’t like radical change because of the uncertainty it brings and instead preferring predictability and consistency.

Credit Suisse strategists were quoted on Friday as saying that foreigners who flocked into Malaysian stocks in anticipation of a BN win are now “a potential source of downside risk’’ because stocks there are expensive. Nomura also reached a similar conclusion, citing heightened political risk and the possibility that foreign inflows will reverse.

As such, the slight weakness here on Thursday when the Straits Times Index dropped about 11 points was widely attributed to investors taking some cash off the table in anticipation of selling in Malaysia when trading resumes on Monday.

Local energy stocks in play

Stocks such as Charisma Energy, Ezion, SembCorp Marine, MarcoPolo Marine and KrisEnergy all enjoyed gains during the week after oil prices rose to 3-year highs following news that US President Trump has ditched its Iran nuclear deal.

As we factor in a premium to account for the increased geopolitical risks in play, better- than-expected compliance to the production cuts from OPEC – mainly due to declining production from crisis-hit Venezuela, as well as faster-than-expected inventory normalisation trends in the US and OECD countries, we are revising up our 2018 average Brent crude oil price forecast to US$70-75/bbl from US$60-65/bbl earlier
said DBS Group Research in a 9 May report “A shot in the arm for oil“.

It added that sustained high oil prices should enhance the cash flows of oil majors, driving capex expansion that filters down the value chain and maintained an “overweight” on the sector.

However, Business Times in its “O&G equities up as oil jumps on Trump’s ditching of Iran nuclear deal” on 10 May 2018 quoted analysts saying it was too early to speak of a significant rerating of the sector, at least until after institutional investors return. This is likely to happen only when the US$80 mark is crossed. “Market watchers generally agree that the outlook for oil prices remains hazy as the health of the oil market is subject to too many concerns” reported BT.

The US dollar and bond yields

On Wednesday, the 10-year Treasury yield, which had been hovering just below 3%, closed at 3.006%. US equities however, closed higher that day, leading to speculation that earnings and a possible “Goldilocks” economy are currently driving stock prices. (A “Goldilocks’’ economy is one which is not too hot, nor too cold, as was the porridge in the children’s fairy tale).

Also puzzling analysts has been the strength in the US dollar, which has traditionally weakened when oil prices rose. Since mid-April, the US dollar index has risen 5%, though this could be linked to the rise in Treasury yields and expectations of more rate hikes by the US Federal Reserve this year.

On Thursday, a benign consumer price report eased inflation worries and pulled the 10-year yield back to below 3%. The US dollar weakened and stocks rose in response. The yield ended the week at 2.97%.


The shipbuilder VARD Holdings is the subject of a takeover-cum-delisting offer by major shareholder Fincanteri at S$0.25 per share. At a recent extraordinary general meeting (EGM) to vote on the offer, shareholders complained that the circular they had received contained a valuation inaccuracy and that proper procedures had not been followed.

The inaccuracy related to the valuation of SembCorp Marine that was used for comparison, as being 1.2 times price/book when it should have been 1.7. The mistake lowered the mean price/book of comparable companies to 1.1 when it should have been 1.2, thus making the exit offer of 0.9 times appear more acceptable.

SGX’s RegCo on Thursday ordered the company to convene another EGM.

The outlook

Maybank Kim Eng in its Singapore Market Monitor on Friday titled “SG got its groove back” said from a valuation standpoint of trailing long-term price multiples, it believes the STI still holds upside headroom due to a “supportive macro backdrop, good earnings growth outlook witnessing upgrades, and dividend yield support of 3.7%+, which is amongst the highest in ASEAN”.

It set an end-2018 target of 3,790 for the index which closed at 3,570.17 on Friday.