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AWSJ - Market reaction
By web aNtu

7/12/1999 8:43 am Tue

Subject: The Market Reactions

Dr M wins - sort of; market totters
By Douglas Appell

This article appeared in the 1 Dec 1999 edition

Political uncertainty still dogs stock market Anybody who expected the
election victory by Prime Minister Mahathir Mohamad's ruling coalition
to dispel the political uncertainty dogging Malaysia's stock market
should think again. The electoral results might keep investors guessing
for a while, even though most analysts still expect the market to rise
strongly next year.

Tuesday's market didn't provide much ground for optimism. A brief
opening rally, fueled by investors returning from Monday's election
holiday, quickly petered out and the Kuala Lumpur composite index fell
11.25 points, or 1.5%, to 734.66. That dashed hopes that Dr. Mahathir's
victory, which followed a year of political turmoil, would quickly fuel
a stock-market rally.

The market's tepid showing surprised many market watches, since the
prime minister's National Front grabbed a comfortable majority of 148
parliamentary seats, against 45 seats for a first-time coalition of
opposition parties united by Dr. Mahathir's political vendetta against
his former deputy, Anwar Ibrahim.

The biggest fly in the ointment for investors is that Dr. Mahathir to
share electoral honors with Parti Islam se-Malaysia, or PAS. The
fundamentalist Islamic party is supported by the same ethnic Malay
majority courted by the prime minister's United Malays National
Organization, or UMNO. While PAS boosted its seats in Parliament to 27
from eight, UMNO dropped to 74 seats from 94. More importantly, PAS took
control of the oil-rich state of Terengganu in the Malay heartland in
the north of peninsular Malaysia, and retained control of the
neighboring state of Kelantan.

With race and religion the most delicate subjects in Malaysia, where
ethnic Chinese and ethnic Indians account for roughly 30% and 10% of the
population respectively, the electoral result is rattling some
investors. "I don't think the market is looking at these results with
glee," says a managing director at a local brokerage house in Kuala
Lumpur. The swing away from the government among Malays is very clear,
with Chinese Malaysians just as clearly flocking to the ruling
coalition, he says.

"Shifts are quite worrying"

At first glance, the election results look "very good for the ruling
party, but the underlying shifts are quite worrying," says a Singapore
fund manager. Many observers dismiss the potential for problems, but "I
wouldn't be so complacent," he says, adding that he'll be more careful
about investing in Kuala Lumpur over the longer term, especially in
sectors such as gaming, which conflicts with Islamic traditions. There
were hints of similar concerns in Malaysia's pro-government newspapers
on Tuesday. In the Star, for instance, which is affiliated with the main
Chinese party in Dr. Mahathir's coalition, a second-page analysis
proclaimed "UMNO's Worst Fears Come True." Despite the huge
parliamentary victory, the article cited an "obvious" reality that the
coalition, "though returned to power, will see a weakened UMNO," which
has always been the dominant party.

Among the concerns investors have is the possibility that Dr. Mahathir
could face a divisive challenge at the next UMNO party elections,
possibly in June, or that UMNO may be forced to adopt a stricter Islamic
line to win back those Malays who have crossed over to support PAS.

Such concerns aren't universal, and many analysts and investors say
Monday's election improved the outlook for stocks. The "results are
generally positive for the market," says William Pitman, the director of
investments with Henderson Investors Singapore. While the election
leaves some issues unresolved, it also leaves Malaysia with a strong
government and favorable economic fundamentals that should support the
market, he says.

Election removed most perceived risk

The biggest concern about Malaysia for investors was political risk,
and this election has removed that concern, says Stephen Weller, the
head of research with Pesaka Jardine Fleming in Kuala Lumpur. He
contends that UMNO's loss of Terengganu to PAS will be enough to prompt
the government to become more open and accountable. After a tense year,
investors are anxious to move beyond politics, and the election should
allow them to do that once they digest the implications, says Dominic
Armstrong, the head of research for Malaysia and Singapore with ABN-Amro
Securities. With Morgan Stanley Capital International adding Malaysia
back to its benchmark indexes, the Kuala Lumpur composite index should
be able to climb toward 1050 by June, he predicts.

The fact that Malaysia's stock market isn't immediately rallying has
more to do with the lateness in the year and continued concerns about
year-2000 computer problems than with the threat of political
instability, says another Singapore fund manager.

For the immediate future, some analysts say they will be watching the
run-up to the UMNO party elections to see if Dr. Mahathir remains firmly
in control. Most observers believe he will be. But some fund managers
are hoping the party elections will provide some clarity about who will
succeed the prime minister when he eventually steps down. "It's very
important to know who's going to become the successor," and some people
may hesitate to jump in before that becomes clear, says a Singapore fund