According to the Malaysian Institute of Economic Research, trade with China, Japan and the US comprises one third of Malaysia’s total trade value. Meanwhile, according to the Institute of International Finance, Malaysia (ASEA) is the second most exposed emerging market after Mexico to changes in US trade policy.
The US administration’s plan to impose a 20% border adjustment tax is expected to hurt Malaysia as 82.3% of its total exports by value are manufactured goods, according to MATRADE (Malaysia External Trade Development Corporation).
Pivoting towards China
If the trade restrictions from the US come through, especially in the form of the border tax, which will make import of manufactured goods expensive, then it may lead to Malaysia pivoting towards China.
With the US walking away from TPP (Trans-Pacific Partnership), of which Malaysia is a party, the latter’s pivot towards China can be expected to come more quickly. In 2016, Malaysia’s Trade Minister Mustapa Mohamed stated that the country was looking forward to the China-led Regional Comprehensive Economic Partnership (RCEP) in case the TPP falls through. The RECP includes six countries apart from 10-ASEAN (Association of South-East Asian Nations) members.
Impact on Malaysian equities
The MSCI Malaysia Index is up 5% in YTD 2017 until February 22. But even this positive performance places it higher than only Indonesia amongst Asian emerging markets. It is far behind the Emerging Markets Asia Index, which has risen 10.8% in the same period.
The broad macroeconomic picture that we have painted for Malaysia in this series would likely see one taking a neutral stance to Malaysian equities (EWM).
However, what is important to note is that domestic consumption will be key to Malaysian stocks in 2017. While higher government spending may play a supporting role in improving the macroeconomic picture of Malaysia, consumers will be at the forefront, driving investor sentiment.
Although the implementation of a border tax by the US would hit Malaysian exports and stocks harder than more service-oriented exporters in Asia, movement in the ringgit will also be a key indicator when measuring global investment sentiment.