The sensational outcome of the elections in Malaysia caught many investors on the wrong foot. Still, to make the country a true democracy requires a lot more though, says Asia expert Will Ballard in an essay for finews.first.

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The fund management community’s ability to predict political events has become something of a sore spot of late. Following a bit of a bad run with Brexit and Donald Trump among other things, one would think we would learn from our mistakes.

The Malaysian election has been another lesson in humility. The Barisian National (BN) party, through a winding web of political alliances, can trace it roots all the way back to Tunku Abdul Rahman, Malaysia’s first prime minister after the country’s independence in 1957. Despite pre-election polls showing a surprisingly tight race, Najib Razak’s grasp of power and BN’s status as the ruling coalition seemed unquestionable only three days ago.

«That insight is one of concern»

Their defeat and the election of Mahathir bin Mohammad has therefore come as a near complete surprise to investors in the region. With the market closed for two days after the election the immediate reaction of foreign investors is less than transparent, however currency forwards and foreign-listed exchange traded funds (ETF) can give us a little insight.

That insight is one of concern. The currency shows signs of weakening and the ETF suggest equities should drop. Certainly not the warm welcome investors gave the resignation of Dilma Rousseff in Brazil, the election of Narendra Modi in India or Moon Jae-in in South Korea and yet those are the parallels that we, as long-term investors, see for the result of this Malaysian election.

The critics point to the populist agenda of the winners’ election manifesto (among their 60 pledges is tucked the potential rolling back of the much maligned goods and services tax, and re-introduction of some fuel subsidies) and the fact that Mahathir is old establishment (with the emphasis on both «old» and «establishment»).

«Over the years, Malaysia has seen a steady clampdown on the press and political freedom»

What is quite clearly missed in my view is the cathartic benefit the country will gain from this change in regime. Over the years, Malaysia has seen a steady clampdown on the press and political freedom and a creeping rise in corruption, culminating in Najib’s alleged misappropriation of assets from 1MDB and the sentencing of Anwhar Ibrahim (a political opponent) on questionable charges. It is a great credit to Najib and Barisian National that this transition appears to be proceeding peacefully.

Should Mahathir stay true to his word and relinquish his seat to Anwhar Ibrahim on his release from jail, this will, in my view, be a strong sign that Malaysia is moving in the direction of a fully-functioning democracy backed by the rule of law.

Will Ballard is head of emerging markets and Asia Pacific equities at Aviva Investors.

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