SINGAPORE (June 18): This week, I would like to share some thoughts on a topic that has dominated Malaysian news headlines and generated much debate among market commentators, analysts and investors alike.

Mega infrastructure is perhaps the most oversold investment theme coming into 2018 and has been the key driving force behind construction stocks listed on Bursa Malaysia.

That all changed after Malaysia’s 14th Gen­e­­ral Election last month: The results took most market analysts by surprise and led to downgrades almost across the board in the local construction sector.

In the few short weeks since, the new government has held true to its manifesto promises to undertake a comprehensive review of all contracts, especially those awarded under direct negotiations or closed tenders. And that includes high-profile projects under the “Big Rail” theme.

Already, it has deferred the High-Speed Rail (HSR) and cancelled the MRT 3 projects, worth well over RM100 billion ($33.5 billion). Meanwhile, the RM55 billion to RM66 billion East Coast Rail Line (ECRL) as well as many smaller projects are under the microscope and could be reprioritised, renegotiated, deferred or aborted altogether.

The resulting delays and/or cancellations will, no doubt, affect short-term growth, not only in terms of opportunity loss for the construction sector but also through the multiplier effect across a broader swath of the economy, from jobs creation, land price appreciation, localised growth, even projected boost to tourism and so on.

Not surprisingly, stock prices for construction companies have taken a beating, with billions in market value wiped out.

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It also creates uncertainties that could affect near-term business decisions and has certainly been frowned upon by foreign portfolio funds, which have been net sellers on the Bursa Malaysia since the election.

However, I believe these are all worthy trade-offs for longer-term sustainable growth.

When we analyse companies to invest in, balance sheet strength is among the most important factors to take into account. History is filled with companies (big and small) that failed under the burden of unsustainably high gearing.

Similarly, countries with overcommitted balance sheets must inevitably adjust, typically through a combination of currency depreciation, interest rate hikes and austerity that leads to recessions.

In the worst cases, a country would be cut off from capital markets while its people suffer from runaway inflation, unemployment and falling incomes. Recovery can, at times, be long and painful — think Greece (also saddled with an inflexible currency), whose economy is still 25% smaller today than before the crisis while unemployment remains at more than 20%.

Clearly, these are lessons all of us must take heed of.

Whatever your definition of debt, whether to include contingent liabilities and off balance sheet financing, it will not change the underlying facts. To take the bull by the horns today is just, very simply, prudent.

Over the longer term, careful balance sheet management and the institutional and public sector reforms being undertaken will lay a stronger foundation for quality and sustainable growth.

As noted, while there have been hot money outflows, domestic retail investors have been buyers on the Bursa for the past four straight weeks. Evidently, foreign and local investors have contrasting expectations. We cannot say one or the other is absolutely right. It is a matter of perspective.

Foreign portfolio funds are, more often than not, opportunistic and short-term. Malaysians, on the other hand, see and believe in the possibilities that come with successful restructuring of the economy. This is a good sign.

Reversing the current trust deficit and restoring confidence of foreign direct investors and local businesses in particular — to re­invest and expand domestically — is key. As is reversing the brain drain. More than anything else, these will be the better guarantee for future job creation and higher incomes.

Quite frankly, for those investors in rent-seeking entities that have been penalised, why should we be unhappy?

That said, the country cannot operate by reducing spending and stopping large projects or reviewing and surfacing crimes committed by the last regime. A comprehensive, forward-looking solution to stimulate sustainable growth without over-burdening the balance sheet is needed.

A strategy to bring in foreign direct investments, privatisation and stimulate the housing sector is crucial — to ensure our economy does not fall into a tailspin.

I acquired 190,000 shares in Singapore-listed Sunpower Group at an average cost of 53 cents a share for the Global Portfolio. For more information on the company, please visit www.absolutelystocks.com. This latest purchase reduced cash holdings to 11.3% of portfolio value.

Total portfolio returns now stand at 5.6% since inception. The Global Portfolio continues to outperform the benchmark MSCI World index, which is up 3.1% over the same period.

Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore

Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.

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