Subject: Asiaweek: KLCI To 700 Unless Change Occurs

Business: Malaysia's Stock Market Slip-sliding away

By a#sIF SHAMEEN

June 10, 2000
Web posted at 3:30 p.m. Hong Kong time, 3:30 a.m. EDT

These were supposed to be the best of times for Malaysia's stock market. Economic recovery is almost complete, corporate earnings are growing, the political arena is calm after Prime Minister Mahathir Mohamad and his latest handpicked deputy, Abdullah Badawi, were elected unopposed to the top posts in the ruling party. And yes, those much despised capital controls have been relaxed -- so much so that they seem to be present in name only, just to give face to leaders who have vowed not to lift capital controls until the world financial architecture is drastically reformed. Moreover, Malaysia is finally back in the benchmark MSCI indices -- which most global fund managers use to track funds. In February, when Malaysian stocks were rallying strongly, equity strategists and fund managers in Asia were forecasting the Kuala Lumpur Composite Index or KLCI to touch 1,100 by June and possibly go to 1,200. But on Thursday, the KLCI closed at 842 -- down nearly 15% from its February peak.

So why are Malaysian stocks slip-sliding? In a word, because the world has changed. Indeed, foreign fund managers who were supposed to be buying Malaysian stocks in the lead-up to and the aftermath of the MSCI reinstatement have been big net sellers of Malaysian equities. Fund managers in Singapore and Hong Kong whom I have been talking to in recent weeks tell me attempts by government ministers to talk up the market have failed because as one of them put it, "there is really nothing exciting about Malaysia."

The Malaysian government is blaming foreigners jealous of Malaysia's recovery of spreading vicious lies about the relationship between Mahathir and chief financial and political adviser Daim Zainuddin. The two men say the relationship has never been better. "I advise, he decides," Daim said last week of his "real relationship" with Mahathir. But unfortunately those jealous foreigners and jittery local investors haven't been listening -- just been dumping shares.

In an effort to perk up the market, analysts in Kuala Lumpur tell me that the government may be considering several moves. Finance Minister Daim wants to hold down interest rates, possibly even cut them -- one last time -- to add liquidity. (Inflation be damned!) Malaysian stocks were hammered in early May when the new governor of the central bank Dr. Zeti Akhtar Aziz hinted that rates might be headed up later this year. Daim has put that notion to rest: he wants rates down and the stock market up. "Our fundamentals are so good, the market should shoot up," he said last week. Daim is also considering removing the remaining part of the 10% exit tax currently levied on foreign investors. But Malaysia won't re-peg its currency for a long time yet. A few months ago, the ringgit was looking 12% to 15% undervalued. More recently as some of Asian currencies have weakened, currency analysts say the ringgit is now close to its fair value. If it is undervalued at all the under-valuation is no more than 5% they say. That's no reason to re-peg.

One of the arguments for buying Malaysian shares two months ago was that you could sell them next year and reap a 15% forex gain after the re-pegging. Now there is no re-pegging likely, there is a 10% exit tax and Malaysian companies are just plain unattractive. Han Ong, regional strategist for Salomon Smith Barney in Hong Kong, says Malaysia had been regarded as a defensive play due to its currency controls and closed current account during the recent global equity meltdown. As rate worries in the U.S. and Europe ease, the attraction of Malaysia has disappeared. Malaysia, he says, now looks like an expensive market. There are other cheaper, more attractive investment locations in Asia.

Moreover, foreign fund managers are again complaining about Malaysia's lack of transparency, lack of corporate governance. In their defense, Malaysian officials point to the plethora of new legislation pa#sed in recent years. But the perception is that even though Malaysia may have good legislation in place, enforcement of such laws leaves a lot to be desired. Big fish are allowed to go scot free, while only some minor players are reined in. There is also the perception that the government is obsessed with pushing up the stock market. Moreover, Malaysia is way behind the rest of the region in corporate restructuring and has kept its door closed to foreign participation in almost everything. And, in spite of Dr. Mahathir's grand Muli-Media Corridor idea, the country is also lagging behind much of developed Asia in technology, Internet development, e-commerce etc.