“Tomorrow after the cabinet meeting in the morning, the prime minister will see Yang Dipertuan Agong [His Royal Highness the King] to resign from his position,” the aide said.

With no clear successor as prime minister, it was not immediately clear who could form the next government.

Analysts said investors are likely to resort to panic selling on Monday amid a fresh political turmoil.

“Knee-jerk sell down is likely while awaiting for the new prime minister and coalition to be determined by the king,” said Yeah Kim Leng, Professor of Economics at Sunway University.

“A quick resolution and new leader accepted by a firm majority will return political stability and refocus attention on containing the pandemic and rebuilding the economy,” he said.

“If the transition is smooth, the stock market will likely rebound higher.”

Muhyiddin’s shaky grip on power has grown more wobbly in recent weeks, with MPs pulling their support and the nation’s king issuing an unprecedented rebuke to the premier.

The government on Thursday announced that on September 7 it would at long last allow a parliamentary vote of no confidence against Muhyiddin, after he blocked such a move for months.

There have been growing calls from the opposition for the prime minister to resign, as his support base crumbles amid growing public dissatisfaction with his handling of the Covid-19 pandemic.

Analysts say uncertainty over who will be in office tomorrow, leads to equivalent ambiguity over government policies – so investors feel it will be best to stay away.

“The current political situation is a key source of uncertainty in the market, one that forms a significant headwind for market sentiments,” said Andrew San, head of Asean equities at asset manager Amundi Malaysia.

Last week, PublicInvest Research wrote that global markets had been reaching new highs while the country “continues to plumb new depths”.

“Malaysia is running the risk of being very late to, and possibly missing out on, the party,” the research house said. “Granted, the drop is not as severe as that seen in March last year, but disconnect with the global markets is disconcerting.”

On March 19 last year, the Kuala Lumpur Composite Index dropped as much as 24.3 per cent from the pre-pandemic high that January, closing at 1,219.72 points – the lowest level for more than a decade. The index was hovering around the 1,500-point mark as of last week.

The PublicInvest report added that foreign investors had sold a net cumulative 5.3 billion ringgit (US$1.25 billion) in equities in the first seven months of this year, despite their relatively tepid participation in the market.

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Foreign ownership of Malaysian equities had also dropped to an all-time low of 20.2 per cent of total market capitalisation as of last month, according to a UOB Global Economics & Markets Research note published last week.

UOB senior economist Julia Goh and economist Loke Siew Ting wrote that foreign investors had reduced their holdings of Malaysian equities for 25 months in a row as of last month, selling about 1.3 billion ringgit’s worth of shares in July versus 1.2 billion in June.

Amundi’s San said before the Covid-19 pandemic, Malaysia was already seeing consistent selling by foreign investors as political dissension began, and the lack of policy implementation acted “as a headwind towards market sentiment”.

“However, political risk and the rate of foreign outflows further climbed as the domestic political situation further devolved into an unexpected change in government early last year, and in turn into various uncharted territories, which raised concerns,” he said.

02:01

Malaysia’s Covid-19 case toll tops 1 million as nation sees record day of infections

Malaysia’s Covid-19 case toll tops 1 million as nation sees record day of infections

“This is evidenced by 11 billion to 12 billion ringgit per annum of outflows during 2018 and 2019, registering nine months of net sales each year, climbing to 24.5 billion ringgit in 2020 with 11 months of net selling.”

In response to queries from This Week in Asia, Bursa Malaysia – the country’s stock exchange – said the level of selling from foreign investors had continued to decline this year.

“While we saw a net outflow of US$1.03 million in the first half of 2021, this was consistent with other markets in the region and Malaysia fared better than most of our Asean peers,” a spokesperson said.

“Regardless of the outflow, foreign shareholdings of Malaysian equities remained above 20 per cent of market capital value as of end-June, indicating that while short-term investors have exited, strategic long-term investors continue to be present in the Malaysian market.”

The gradual reopening of domestic and global economies as nationwide herd immunity, targeted to be reached toward the fourth quarter of the year, will be favourable to the local market, the spokesperson said, adding that Malaysia remained attractive to investors given its current inexpensive valuation and the potential for positive re-ratings on recovery themes.

Political turbulence

In February last year, the then ruling Pakatan Harapan coalition led by Mahathir Mohamad was ousted by current premier Muhyiddin’s Perikatan Nasional alliance. Analysts say the shock internal coup, and the long period of political turbulence that followed, have resulted in the poor implementation of government policy, which has directly and indirectly impacted many of the country’s industries.

San said these included the construction, telecommunications, and energy sectors, with knock-on effects on the wider economy including dampened consumer sentiment and corporate investment, including foreign direct investment.

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“This is a major factor for investors shunning the [Malaysian] market and moving to markets with more attractive narratives,” he said, adding that the likes of Vietnam and Indonesia were becoming viable destinations.

Vietnam had enjoyed strong and resilient economic growth over the medium term as one of the key beneficiaries of trade relocations due to the China-US trade war, San said, while Singapore and Indonesia were also seeing renewed interest from foreign investors with the potential listings of tech unicorns such as Grab, Bukalapak and Tokopedia.

“Therefore, while political risk is heightened, Covid cases remain elevated and there is a lack of large-capital listings to excite the Malaysian market, foreign investors are likely to just remain on the sidelines for now,” San said.

While Malaysia has struggled to contain the spread of Covid-19 infections, it has been able to pull off one of the world’s fastest inoculation drives, hitting over 500,000 vaccinations on some days.

As of Saturday, 16.5 million people – or more than 50 per cent of the population – have received one dose, while 40 per cent of people have been fully vaccinated, according to government statistics.

However, the high number of Covid-19 infections, and the death rate, which stood at more than 12,500 as of Sunday, have dampened investor sentiment.

“The fact that Malaysia has recently achieved one of the highest vaccination rates globally has been one of the few positives that we see for this country and for the market. With herd immunity expected to be achieved in a matter of months, the prospect of reopening soon is very real,” San said.

“However the number of daily Covid cases, hospitalisations, and deaths continue to reach all-time highs, and such trends make it difficult for the market to pinpoint the start of a recovery trend and the subsequent reopening of the economy.”

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PublicInvest described the vaccination surge as a “light at the end of the tunnel”, with particular regard to reopening the economy.

“That slight flicker appears to be moving further away from the horizon however, given the current state of affairs domestically,” the research house said in its report. “Political-related meandering seems to have diverted attention away from the real fight – against the pandemic. As the market continues to slide, what do we do?”

Luring back investors

The experts say there are multiple indicators that would make Malaysia an attractive proposition for foreign buyers. To San from Amundi, these include political stability, better handling of Covid-19, and the availability of mega initial public offerings, as seen in other Association of Southeast Asian Nations (Asean) markets.

“An improvement in the political and Covid situation would dramatically see a return of foreign interest, although perhaps not to the same extent as prior to the start of the foreign selldowns that we experienced over the past three or so years,” he said.

Malaysia on Friday announced that its gross domestic product (GDP) had risen 16.1 per cent on an annual basis from a Covid-19 induced slump a year ago, helped by an improvement in domestic demand and robust exports.

However, GDP shrank on a quarterly basis, while the central bank cut its full-year growth forecast to 3.0-4.0 per cent from 6-7.5 per cent previously. Still, Bank Negara is optimistic that the country’s vaccination drive will allow for a gradual reopening of the economy and a rebound in the second half of the year.

“Malaysia’s growth recovery is expected to broadly resume in the later part of the second half of 2021 and improve going into 2022,” central bank governor Nor Shamsiah Mohd Yunus said in a statement.

Additional reporting by Reuters