Liquidity Bandwagon Rumbles Into Malaysia
International Herald Tribune
January 20, 1996
Rupert Bruce 

MALAYSIA'S stock market is one of the greatest investment contradictions in Asia. In the first two weeks of 1996 the Kuala Lumpur Composite Index has risen more than 6 percent. Its climb comes in the face of the widely accepted problems of a large and growing current account deficit, soaring consumer spending and a potentially overheating real estate market.

"I think at this point in the game, when liquidity flows are picking up, if you talk about political questions or price valuations or excessive growth of current account deficits you get run over by a truck," says Paul Schulte, regional strategist at CS First Boston. "These were legitimate issues three months ago but are not now with interest rates collapsing all over the world."

Analysts say that fund managers who are buying Malaysia are buying it for precisely this kind of reason: They do not like the fundamental economics and regard the stock market as expensive, yet they dare not miss out on a liquidity driven bull market.

To judge by the numbers, Malaysia seems to have few macroeconomic problems. Gross domestic product has grown at a rate of more than 7.5 percent each year since 1988, and this year the government forecasts growth of 8.5 percent. During the past eight years per capita incomes have doubled to nearly $4,000. The country even looks prosperous, with new office developments and shiny luxury cars crowding the streets of the capital, Kuala Lumpur.

But it is precisely these kinds of luxuries that make economists nervous about Malaysia. They say that imports are swelling the current account deficit to dangerous levels: In 1994 it stood at 11.6 billion ringgit ($4.52 billion), or 6.6 percent of GDP, but projections for 1995 show the deficit at 18 billion ringgit, or nearly 10 percent of GDP.

To allay investors' fears of an overheating economy, Anwar Ibrahim, the deputy prime minister and minister of finance, announced in his October budget that he would reconsider the building of several multibillion-dollar infrastructure projects and take steps to cool the property market.

For the moment, though, international fund managers remain unconvinced that the government of Prime Minister Mahathir bin Mohamad is serious about slowing down the economy. "Right now the government's rhetoric is really creating some concern in the market, especially among foreign investors," says one fund manager. He explains that none of the government's recent statements have helped convince him that the country's economic problems are being taken seriously.

Short-term, an expert investor can probably make good money out of the volatile swings in Malaysian stocks. Mr. Schulte of CS First Boston says that because the stock markets in the region are so small, a relatively small investment can move them: To buy 0.5 percent of a large company in Malaysia, for example, one would have to buy all of the shares available on the Kuala Lumpur exchange for six days. To buy the same stake in a Malaysian smaller company would take 13 days.

To longer-term investors — which, experts warn, should include all private investors — volatility is a moot point. "If you are looking at things on a stock-by-stock basis and a company represents good value, we may still buy it despite everything else," says Chrissy Keen, investment communications director at Fidelity Investments.

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