Malaysia Series: Part 1 0 comments

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Sustained volatility is one of the signs of increasing risk (or equivalently, the perception of it) and it is possible that there could be a cyclical slowdown in the US economy (see "US Consumption Slowdown"), if not the world. Yet all is not lost for long-only investors. There are certain economies where structural-driven dynamics might be interesting against the backdrop of the long-term emerging Asia story. And increasingly, I have come to believe that Malaysia is one of the best structural stories hitherto underneath most institutional investors' radar (until early this year when there was a good-sized rally, which I believe might resume soon).

It'll probably take several parts to cover the various interesting themes associated with Malaysia. Clearly, it is not a new market for most veteran investors. Unforunately, my impression is that many retail investors have shunned it due to terrible experiences in the CLOB debacle where many lost nearly all their money. My writeups will be based on my limited experiences and readings on the Malaysia economy, and many will be more knowledgeable than me on this market. Please feel free to contribute insights.

Below will be several observations on the Malaysian economy and market which I believe show promise for investors on the Bursa. They are grouped under Base (the incumbent baseline) and Growth Drivers (what will catalyse growth and investor attention). Specific themes will be examined in later parts.

The Base

Reasonable fundamentals
It was considered as one of the Tiger economies of Asia, enjoying 7-8% annual growth, before the 1997-98 currency crisis hit. Today, it grows at a rate of 5-6%. It is considered one of the more developed "developing countries", has low unemployment rate of 3%-odd, has a historically resilient domestic consumption base with relatively high per-capita income (as reflected in their being Southeast-Asia's biggest car market), and traditionally strong government spending. It has, however, been able to attract less FDI (foreign domestic investments) in recent years.

Erstwhile investor cynicism
And it is a good thing, because it ensures that market valuations and hopes are not excessive. As mentioned above, the CLOB saga scared away many retail investors from Singapore, while capital controls imposed during the height of the currency crisis alienated foreign institutions. Recently, there is market evidence that the latter are returning to bargain-hunt.

The Growth Drivers

Political commitment to change
The Mahathir era is over and under Abdullah Badawi the government appears to take a more centrist and moderate approach than before, for example in foreign relations towards Singapore, as well as Badawi's promotion of "progressive Islam". With regard to foreign investments, it is possible that the Bumiputra policy enshrined in the NEP (New Economic Policy) may be diluted under the new regime, in particular concerning compulsory Bumiputra equity ownership of companies. With regard to land controls, government regulations over foreign purchases of luxury homes have also been relaxed. Probably most importantly, there is a move toward GLC restructuring to improve efficiencies: stories in progress include Proton, MAS, and the government-backed giant merger of Sime Darby+Kumpulan Guthrie+Golden Hope (all three government-linked). Consolidation of the banking sector is already largely done in the aftermath of the Asian flu.

Arab money
I had written about the flow of petrodollar investments out of the Middle-East. Historically much of this has gone to the West but now the Arabs feel less welcome. It is also common knowledge that Asia is the world's fastest growing region. So where does the Arab money flow? Through Islamic-friendly financial centres in Asia. Malaysia has a well-established Islamic finance infrastructure, shares similar religious roots and convictions, and as a gateway to Asia for Middle-East investors appears a natural destination. Already there is anecdotal evidence of consumption being buoyed by wealthy Arab tourists. Malaysian construction companies get plum building contracts in the Middle-east. And just look at the recent tussle to acquire Islamic bank RHB (Rashid Hussain Bhd) with rival consortium bids by Qatar Investment Authority and Kuwait Finance House.

Various resource-based themes
The world economy has been kind to resources-rich countries these few years. This should continue as the twin Asian engines of China and India continue to develop. Oil and gas , palm oil, timber, rubber, tin --- with the first two being hot global themes, the first three contributing significantly to Malaysia's GDP, and in many of these resources Malaysia is one of the global market leaders.

The bottomline: It may be time to look at active investing in KLSE stocks.

Useful sites
Highly recommended sites for further reading:

Forum: Moolah's Bursa Malaysia Stock Forum

Blog: Salvador Dali's Malaysia Finance- Blogspot


References:
(1) The Star article Dec 2006: Interest in selective laggards
(2) The Star article Feb 2007: Three-cornered ‘fight’ for RHB