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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 Staff Reporter of THE ASIAN WALL STREET JOURNAL 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 manager.