AROUND THE MARKET : Investors give Kuala Lumpur a second look
International Herald Tribune
May 13, 2002
Douglas Appell

Do global investors hold grudges? The Malaysian stock market's recent strength is strong evidence that they do not.

Three and a half years ago, many observers wrote off Malaysia when its government, at the depths of the Asian financial crisis, broke with free-market orthodoxy and imposed capital controls. A decree locking foreign money in the country for one year left fund managers howling.

Many of those fund managers are back today. In recent months, foreign interest in Kuala Lumpur has rebounded to its highest level since before the regional crisis erupted in 1997, said Dominic Armstrong, head of research for Singapore and Malaysia at ABN AMRO Asia Securities.

If you gathered together 50 foreign investors who had money in Malaysia before the crisis, Armstrong said, there could be "two or three who still say 'My God, investors have got a short memory,"' while perhaps 30 would already be back in the market and the rest would be watching with interest.

There has been enough progress on the reform front to attract them, Armstrong said. The past year has seen a "total turnaround" in attitudes toward corporate governance while the government has been pushing along restructuring in crucial sectors such as banking and telecommunications.

Such arguments have not won over cynics, who continue to fear the close government-corporate ties established under the "Malaysia Inc." banner during Prime Minister Mahathir bin Mohamad's 20-year rule. Until recently, investors have squawked that their interests were being sacrificed to prop up tottering government-linked companies such as Renong Bhd., an investment holding company, and Malaysian Airline System Bhd.

The simple fact is that the upturn in the U.S. and expansionary policies at home have left the Malaysian market with "a lot of upside" — perhaps another 100 points for the benchmark Kuala Lumpur Composite Index by the end of the year, an economist in Kuala Lumpur said. (The index closed Friday at 788.54.) Fund managers living with three-month or six-month horizons are not going to let themselves miss out on that, he says.

Decisions on whether to invest again in Malaysia, like much else in the country, are affected by opinions on Mahathir.

One U.S. fund manager, who recently put a big chunk of money in Malaysia after a four-year absence, said she was partly drawn by signs that Mahathir was going all out to clean up the market and the economy in an effort to burnish his already formidable legacy. The progress that has been made in banking, telecommunications and construction should leave corporate profitability on a dramatic upswing, she said.

A San Francisco-based fund manager concedes that progress has been made but has "personal problems" about investing in Malaysia after the bitter experience of 1998. If the global economy goes sour again and money starts to hemorrhage, Mahathir would reimpose capital controls, the fund manager warned.

At the end of the day, most investors say they would not be inclined to hold a grudge while the Malaysian market is rallying. But should another financial crisis threaten, several said the first place they would look to take their money out of would be Malaysia.

Douglas Appell (Special to the IHT)

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