KUALA LUMPUR/SINGAPORE (Mar 12): The euphoria following Malaysia’s historic election last May has faded, leaving its stock market as Asia’s only one in the red this year.

The benchmark FTSE Bursa Malaysia KLCI index has fallen more than 1% so far in 2019, the only decliner in the region, while neighboring Singapore has surged 4% and Indonesia gained 3%. The trend is unlikely to change as investors wait for Malaysian government initiatives to cut the budget deficit, clamp down on corruption and boost purchasing power.

“It keeps coming back to where the country is going to go, it’s kind of on the government to lead the way,” said Jalil Rasheed, a Singapore-based investment director at Invesco Asset Management. “Anybody who is taking a long-term view in Malaysia over the next five to 10 years needs to be quite patient for the next two to three years.”

Finance Minister Lim Guan Eng is calling on investors to buy Malaysian assets now, before they turn expensive once the fiscal situation gets back on track in three years. The new administration has been in clean-up mode: canceling and reviewing billion-dollar projects while replacing dozens of CEOs at state-linked companies. That led growth to ease to 4.7% last year, with the government targeting a pick-up to 4.9% in 2019. Economists aren’t so sure, predicting growth to reach just 4.5%.

A string of weak financial results haven’t helped, with companies including Axiata Group Bhd. and Nestle Malaysia Bhd. missing estimates. Malaysia’s earnings lagged its neighbors’ to fall 3.15% last year, compared with 8.8% rise for Singapore and 18% gain for Indonesia. Earnings in Malaysia are expected to rise only 1 to 2% this year, said Sean Gardiner, Morgan Stanley’s Southeast Asia strategist in Singapore.

“We would need to see jitters coming back to emerging markets so that investors appreciate Malaysia’s defensive nature,” Gardiner said.

Execution Risk

To woo investors, the country has rolled out an updated five-year economic plan that promised transparency and institutional reform. It pledges to address productivity growth, streamline state spending to prevent corruption, and widen its fiscal space by raising tax compliance.

Still, “talk is cheap, and now it’s a question of implementing,” said Alexander Chia, head of regional equity research at RHB Bank Bhd. “Clearly there is a lot of execution risk, implementation risk and obviously a lot of political risks.”

This isn’t unique to Malaysia, he said, as changes in government in India and Indonesia also left markets struggling for about 18 months before showing signs of recovery. India’s S&P BSE Sensex index declined 5% the year after its 2014 polls before gaining 2% in 2016 and 28% in 2017. Indonesia’s Jakarta Composite Index slid 12% in 2015, the year after its elections, before rebounding 15% in 2016.

Power Transition

Malaysia’s case may be complicated by an expected handover of power from Prime Minister Mahathir Mohamad to Anwar Ibrahim, who was promised the top seat before the election. Anwar, who leads the largest party in the ruling coalition, said Mahathir had made it “very clear” that the change would happen by May next year.

The two men have presented a united front to the public, belying years of enmity between them involving Anwar’s sacking as Mahathir’s deputy and his subsequent stints in prison for charges that he said were politically motivated. Anwar himself has shown signs of impatience. Despite saying he would spend a year away from politics since his release from prison last May, he returned to campaign for a parliament seat just five months later.

“It’s difficult to have a positive outlook when there is political infighting and weak outlook on growth from fiscal tightening,” said Alan Richardson, a regional fund manager at Samsung Asset Management Co. in Hong Kong. “There appears to be frustration with a lack of tangible benefits under the new government and the shadow of race-based politics.”

The doldrums may last toward the end of 2019, when the country’s stock market may find a reason to gain if the government charts out better-than-expected spending in next year’s budget.

If everything falls into place, Malaysia "could be a shining light of an emerging market,” Invesco’s Rasheed said. “It’s all in the execution.”