Saturday, January 02, 2021

Geopolitical Alpha - How to think about investing in Malaysia


Geopolitical Alpha by Marko Papic is an ambitious piece of work that is possibly the first of its kind. It attempts to show investors how they can sharpen their political analysis skills in order to derive extra profit from financial markets. I have to admit that the greater part of this book is very much beyond me as I don't have any training in political science and really hated my Constitutional law classes, but I will try to distil its key ideas and apply it to the SE Asia context.

There are three pillars to political analysis for investors :

a) Dialectic Materialism

The first point of geopolitical analysis must be attuned to the material. The substance is more important style. At every step, the analyst needs to ask themselves what the material constraints are. The rest of the book discusses the various constraints which are political, economic, and geographical as primary points of consideration. 

b) Diagnosticity of Constraints

The second point is that the constraints are diagnostic. We have empirical information backing up our assertions about what these constraints are. Where we have hard data, it trumps political instincts and intuition. Naturally, as someone who leans to the quantitative, this idea really appeals to me.

c) The person versus the situation

The third point is that where a person is confronted with the situation, the situation always win. Making political analysis based on a person's inclination is worthless if the situation does not allow his wishes to be fulfilled. An example is Trump's attempts to torpedo Obamacare. He will not be able to get it through moderate Republicans. 

Beyond the three pillars is the key idea known as the Median Voter Theorem. This is possibly the most valuable idea in the book. For policymakers and politicians to stay in power, they must continuously enact policy that appeals to the median voter. This makes sense to me: the PAP cannot repeal s377a because the median voter does not support that idea, not because the cadre have heteronormative tendencies. If you observe the WP's stance on the same issue, they are taking the same tactic of ignoring s377a - both PAP and WP are playing to the tune of the median Singapore voter. And we are seeing results - WP as PAP-lite receives more traction than SDP which is anti-PAP and possibly homonormative. When hard empirical data shifts on local attitudes towards same-sex unions, the law will be repealed instantly - no ballot box required.  

Let's apply the same principles to Malaysian politics to determine whether it is a good destination to invest our Singapore dollars. 

Malaysia's perpetual problem is that it is facing emigration. There are close to 1 million Malaysians in Singapore and thousands of Malaysian Chinese leave every year (mostly to Singapore and Australia) which reduces the tax revenues and technical know-how of the country. Interestingly, the Malaysian Chinese are replaced by Indonesians so net immigration is a positive number.

A big overhang for Malaysia is the brain drain and this will be exacerbated by the decreasing importance of oil to advanced economies. The operative question any investor should ask is whether the political process will ever blunt the racial policies of the country. If Malaysia blunts the affirmative action policies of the country, it can reduce the flow of Chinese labour to other countries.  

If we apply the Median Voter Theorem, we will come to the conclusion that the median voter, being likely a rural Malay, will never give up their affirmation action policies without a fight. This is a political constraint that will cause even a genuinely reformist government to stumble. If you had come to this conclusion, any Malaysian political party that talks about dismantling Bumiputra privileges will be defeated in the ballot box or would not be able to enact any meaningful legislation.

So we don't expect the NEP to disappear within our lifetimes and likely, we should expect the Malaysian Chinese Diaspora to continue. 

If you look at the position from Singapore's point of view, Malaysian Chinese labour presents a cheap resource for us that we will continue to welcome even in the face of xenophobia - Malaysian Chinese are easy to integrate so much so that me and my kids have Malaysian Chinese blood in us. We will be beneficiaries of this immigration for decades to come. 

Once we understand this constraint, we will be careful if any investment thesis relies on progressive reforms in Malaysia. The fewer Chinese there are in Malaysia, the more aggressively the median Malaysian voter will defend the NEP, the more capital and technological know-how to flee the country. This means lower taxes for their government, larger deficits, over-expenditure, and a lagging economy in the future.

This is why I told my Malaysian relatives that keeping money at home will mean $4 MYR to $1 SGD within their lifetimes. Worse, any false dawn involving a progressive political party in Malaysia will lead more Singaporeans into losing their money in the form of landed property and condominium purchases. For change to happen, something must happen to an average Malaysian citizen, someone a Singaporean will never be able to understand as all he knows are the urban Malaysian Chinese who hang out here.

As half my family is Malaysian, this is depressing stuff.  

After this mental exercise, I finally understand why our government is so warm and obliging to the UMNO government, and more hesitant when dealing with Malaysian progressives. 

But there is an upside to this analysis, I suspect the political pendulum will shift back to BN within 10 years and both Singapore and Malaysia will review the High-Speed Rail again.

I hope my son can take a 90min train to KL within my lifetime. He can date Malaysian girls over the weekend and still come back home for dinner. 

And continue the tradition of marrying Malaysian girls.



  1. M'sia would fall into my collection of shithole countries & the "too difficult" pile (from retail investor perspective).

    Sure, you could get lucky & strike the 1-in-100 years lottery in M'sia rubber & PPE companies, or manage to dig up rare diamonds like Public Bank Berhad and hold it thru hell & highwater.

    But I would rather spend 1/3 the effort & 1/10 the stress to focus on the other less-shithole countries & the "easy-er" pile, with better results.

  2. Is your view on Indonesia any better? Sadly for me, I don't understand its politics.

  3. Indo falls into the shithole category. However its catalysts & mkt and demographics potential are much better than boleh land. I'd use Indo as satellite speculation. Same for places like pinoy land, bangla, samba land.

  4. If you're interested in geopolitics, you got to take a look at Peter Zeihan's stuff. He has far-reaching conclusions by looking at demographics, geography and politics. If he's right it has big investment implications, mostly black swans.

    He also wrote books.