In Kuala Lumpur Market, Too Much of Good Thing: INTERNATIONAL STOCKS 
International Herald Tribune
July 30, 1991
Michael Richardson

Lumpur Stock Exchange, including privatization of state-owned companies, is intended to create a more broadly based securities market in Malaysia.

But investors and brokers worry that the deluge of scrip, which has sharply diluted earnings per share, will depress market prices at a time when the economy is overheating and interest rates are rising.

The Kuala Lumpur Stock Exchange Composite Index closed on Monday at 607.11, up 1.65 points on Friday's close, but well below its all-time high of 640, which was set in late May after a frenetic but short-lived rally.

The Malaysian government split the interlocking stock exchanges of Singapore and Kuala Lumpur in late 1989 as part of a long-term plan to create a stronger securities market in Malaysia that would appeal to foreign as well as local investors.

The immediate effect was to shrink the size of the Kuala Lumpur exchange by removing 54 companies that were incorporated in Singapore.

However, that loss has been covered by a spate of company flotations and rights issues that has helped increase the capitalization of the Malaysian market to 164 billion ringgit ($59.2 billion), compared with $45 billion for the Singapore exchange.

In 1990, as the Malaysian economy grew by 10 percent after adjustment for inflation, there were 36 new listings by companies on the Kuala Lumpur exchange and 38 rights issues by already established firms.

These cash calls to expand operations or reduce debt raised a total of 8 billion ringgit. In 1991, analysts expect cash calls to raise a further 5 billion ringgit.

"It's a double-edged sword because although the financial health of the corporate sector has improved, average earnings per share have been diluted," said Nick Seaward, director and Kuala Lumpur representative of Baring Securities (Singapore) Pte.

Baring estimates that total net debt of Malaysian listed companies fell to 2.45 billion ringgit in June 1991, from 6.96 billion ringgit a year earlier. By June, 1992, the level of corporate debt is expected to fall even further, to 1.41 billion ringgit.

As a result, corporate debt-to-equity ratios in Malaysia will plunge from 26.2 percent of shareholders' funds in 1989-90 to just 3.6 percent in 1991-91.

However, Hatim N. Hoosenally, director and Malaysian representative of Hoare Govett (Asia) Ltd., said that the issue of so many new shares would reduce average growth in earnings per share from 28 percent in 1990 to 13 percent in 1991 and 4 percent in 1992.

At the same time, analysts expect that real corporate earnings in Malaysia will fall to 5 percent in 1992, from a heady 21 percent this year.

This will happen despite continuing real growth of about 8 percent annually in the Malaysian economy because many companies are running at near full-capacity and it will take time before new investments to expand production generate profitable returns.

Some brokers think that the Kuala Lumpur market still has enough steam for the composite index to reach 700 by the end of 1991, thanks to continuing strong performance in the banking, manufacturing and packaging sectors.

However, Paul Chan, senior investment analyst in the Malaysian representative office of OCBC Securities Pte., expects the Malaysian stock market to remain flat for the rest of 1991 and says investors should take a very selective approach.

"Basically, it's a situation of tremendous supply of shares in the market which exceeds demand," he said.

Recent rumors of market rigging and insider trading have not helped. Following persistent reports, BBMB Securities Sdn., the stockbroking arm of state-owned Bank Bumiputra Malaysia Bhd., said in a terse statement on July 6 that it had suffered losses of 72 million ringgit as a result of trading irregularities between September 1989 and March 1990.

Mahathir bin Mohamad, the prime minister, said 10 days later that the government would take action against anyone guilty of insider trading. But so far only one summons has been issued - to an unnamed former BBMB Securities officer who is charged with having acted as a dealer's representative without a license. The defendant is due to appear in court on Aug. 13.

While brokers say that the stock market has shrugged off the latest scandal, a growing current-account deficit, rising inflation and the prospect of higher interest rates before the end of the year continue to weigh it down.

Most Malaysian banks recently increased their base lending rates by half a percentage point, to 8 percent. Brokers expect a similar increase in the second half but say that investor fears of a larger rise might have a depressing effect on the market.

Anwar Ibrahim, the Malaysian finance minister, warned last week that an explosive increase in consumer spending over the past few years has created a real danger of runaway inflation.

He added that although the current level of around three percent in the annual rate of inflation in Malaysia was quite manageable, "what is alarming is the underlying groundswell of inflationary tendencies which, if left unchecked, can unleash an inflationary spiral."

Copyright © 2006 The International Herald Tribune