TOKYO -- Malaysia woke up to uncertain financial markets on Monday, as trade started for the first time since the stunning victory of the opposition alliance led by 92-year-old former Prime Minister Mahathir Mohamad last Wednesday.
The benchmark KLCI index slipped nearly 3% before erasing losses and edging higher to close at 1850.42, up 0.2%. The Malaysian currency ringgit also fell by 0.7% against the U.S. dollar before paring losses, partly on worries over the country's deteriorating fiscal balance.
Most economists say that financial market volatility is expected until details emerge about the new government's economic policy.
Investor concerns could be deeper than the performance of the financial indexes suggests, with some analysts saying the government may have been propping up the markets. For now, the markets are reacting to populist pledges made by Mahathir during the election.
One big issue is the country's future relationship with China.
The previous government led by Najib Razak took a decidedly pro-Beijing stance, and eagerly promoted infrastructure projects that are part of China's Belt and Road Initiative to connect China with Central Asia and Europe.
Mahathir has said he is going to review infrastructure projects, a suggestion that has spooked investors. Shares of Gamuda, the nation's largest construction company, fell as much as 19% on Monday.
"Najib had a pro-China policy, the regime change is uncertain for companies like those in the infrastructure sector related to China closely," said Masato Horie, senior economist of Mitsubishi UFJ Research and Consulting.
AirAsia is another company whose shares were hammered following the loss of the ruling party. AirAsia chief Tony Fernandes previously bragged about his close ties to Najib, but that has become a liability. He had shown his support for the former leader, by posing with him on board an AirAsia plane and having a plane painted in the blue colors of Najib's coalition.
On Sunday, he apologized for such antics. "I came under intense pressure, day by day ... it was getting harder and harder to resist pressure from the prime minister [Najib]'s office," he said. Air Asia shares fell almost 13% at one point.
Malaysia's second largest bank CIMB Group Holdings also fell nearly 7%. The group's chairman is Nazir Razak, Najib's younger brother.
By contrast, stocks that stand to benefit from the new government's expected policies flourished. They include Thriven Global, which is chaired by a son of Malaysia's new home minister, Muhyiddin Yassin. Thriven Global rose 120%.
Consumer stocks, such as Nestle Malysia, also attracted bids, as investors expect Mahathir's pledge to scrap the country's goods and services tax to boost private consumption. Nestle Malaysia stock rose as much as 6%.
So far, the policies pursued by the new government are aimed at creating jobs and boosting consumption, said Bernard Aw, an economist with IHS Markit. Mahathir said he wanted to make sure that foreign direct investment in Malaysia will really create local jobs for Malaysian workers and companies, and not just benefit Chinese companies, Aw said.
Mahathir's government will also pursue policies designed to help ordinary people, such as fuel subsidies and the abolition of GST, a move that could have a negative impact on Malaysia's fiscal health.
But Aw doesn't believe Mahathir is seeking a break from China or putting his country's finances at risk. He expects there to be "a big change" but not "a radical change," and put his faith in Mahathir's experience of leading the country for 22 years till 2003.
"Mahathir helped navigate Malaysia through two financial crises," he stressed.
Mahathir came out of retirement and led the opposition Alliance of Hope, turning his back on the incumbent Barisan Nasional party he once led. The decision to run in the election was in part driven by his concern about rampant corruption in Najib's government, and also the rising cost of living for ordinary Malaysians.