Curbs Off, Investors Rush to Malaysia 
International Herald Tribune
January 18, 2000
Thomas Fuller

For stock-market watchers in Asia, 2000 has begun with a paradox. The Kuala Lumpur stock exchange, the market that investors loved to hate, is now Asia's best performer, up 17 percent since the year began.

On Monday, rallying along with markets in Tokyo and Seoul, the Kuala Lumpur exchange rose almost 3 percent, its seventh straight day of gains. Market players say they expect the Malaysian exchange to ride higher as foreigners rush to buy shares that only months ago, because of government controls, were considered off limits to international investors.

"It's the charge of the herd," said Dominic Armstrong, head of research for Singapore and Malaysia at the Dutch financial services company ABN-AMRO Holding NV. "Everyone knows that sometime between now and May they are going to have to build up positions in Malaysia. It's institutional panic."

The buying spree revolves around a technicality: Malaysia will be readmitted to an influential stock index in late May that fund managers use to gauge their performance. But understanding why the market has begun to rally now, four months before Malaysia's return to the index, is anyone's guess, analysts say.

Stocks of companies that were sold off two years ago and criticized for "crony capitalist" practices are being snapped up by foreign buyers at a fevered pace. Most of the companies have done little to address the flaws that foreign investors decried at the time. Almost all the companies are under the same management as they were then.

"Fund managers are funny people," said Tunku Afwida Malek, herself a fund manager at Commerce Asset Fund Managers in Kuala Lumpur. "They pile in when others pile in. They panic when the market goes up. When the market goes up by 5 percent, they suddenly start thinking, 'Oh my God, I'm not in the market."'

With a bull market in full swing, Malaysia is benefiting from the forces of global capitalism that its leaders so often condemn.

Eighteen months ago, Prime Minister Mahathir bin Mohamad imposed controls on flows of money in and out of the country and told international investors they would not be allowed to sell their stocks for a year.

In response, Morgan Stanley Capital International removed Malaysia from its MSCI indexes, saying capital controls had "eliminated Malaysia from the universe of investment opportunities available to international investors."

MSCI later said it would reinstate Malaysia in the index after Kuala Lumpur eased its controls by replacing the one-year minimum holding period with a 10 percent tax on profits.

Some foreign investors say they are happy that capital controls have not been totally dismantled, as they provide a barrier against currency volatility.

The Malaysian economy clearly has improved since the dark days of its crisis. Exports have risen, inflation has remained low, and factories have ramped up production of television sets and computer chips.

But it is the sudden and sharp upturn in the market that many economists and some investors find irrational.

"The real economy is improving, but it's not going by leaps and bounds to justify the kind of bull run we have in the stock market," said Mohamed Ariff, executive director of the Malaysian Institute of Economic Research.

Analysts say the same fund managers who criticized Malaysia's politically connected "crony capitalists" may be helping save those tycoons' crumbling empires by injecting cash into the market.

Companies with high levels of debt will now be in a better position to reduce that debt or convert it into shares.

"Foreign fund managers complain so much about political connections, and then they go back and buy into those same companies," said a Malaysian fund manager who asked to remain anonymous.

One of the biggest winners in the rally Monday was Time Engineering Bhd., a politically well-connected company that has debts of 4.5 billion ringgit ($1.18 billion).

The company's court protection from creditors expires at the end of this month.

Yet shares of Time rose 19.4 percent Monday, to 2.40 ringgit.

The benchmark Kuala Lumpur composite index rose 25.18 points on Monday to 953.42.

Copyright © 2006 the International Herald Tribune