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Skip Navigation LinksHome :: Back Issues :: Life after the dragon attack

February 2001

Life after the dragon attack


Malaysia has emerged from the Asian crisis to find itself occupying a lower place in the regional pecking order. From being one of the must-have equity markets for foreign investors, it has become an also-ran. Domestic equity demand is also depressed and it’s likely that in the near future bond markets will offer more interest.




Sing Nien Kuai Le - the traditional greeting as the Chinese enter the new year - literally means "surviving the attack of the dragon". The sentiment is apt, says David Chua, group managing director at HLG Capital, describing the mood in Malaysia as it grapples with recovery.
Sitting in his Kuala Lumpur office in sight of the Petronas Twin Towers, Chua is in thoughtful mood. "There's a new order in the world and all of us are trying to see what is the appropriate role we can play in this new world order. We have all been used to growth. You live a lifestyle which is supported by long-term growth and then all of a sudden you have to start managing your expectations."
Chua describes recovery from the economic crisis as like an earthquake, from which everyone emerges preoccupied with being grateful to be alive. But after the initial relief comes the realization of what has been lost. "You have to start dealing with your inner self," he says. "If you look at Asia - it's not just Malaysia - we survived 1997 but all of us were in denial because it was something we never dreamt of."
"We are no longer in the denial syndrome," says Nik Nasir, head of corporate planning at Maybank. "We are now quite open to looking at these challenges," he adds.
By the end of 1999 most Asian countries were starting to get back on a firmer footing. "The stronger tigers - Singapore, Hong Kong and the like - made the swiftest in-roads, followed by Malaysia, Thailand and the Philippines," says Chua "but the misfit has always been Malaysia." The country, he continues, does not quite belong in the group with Thailand or the Philippines, nor does it make it into the set with Hong Kong, Singapore, Taiwan and South Korea. "People consider Malaysia to have the middle-child syndrome."
The same issues affect the stock market. In the early 1990s, according to one analyst, Hong Kong, Singapore and Malaysia were the only three markets that a foreign fund manager needed to study. "Today, Malaysia has been marginalized from being number three to number six," he says, behind South Korea, Taiwan and China, as well as Hong Kong and Singapore. Back then, managers might have held 20 or 30 Malaysian stocks, now they hold two or three for the market weighting and another two or three for out-performance.
"The issue right now for Malaysia is going forward - are we going to be perceived as being in the upper or lower level?" Chua wonders. He sees the crux of issues facing Malaysia, and the rest of Asia, as the awakening of the People's Republic of China as a consumer and a producer, and a nation attracting world capital. As a result, countries such as Malaysia, Singapore and Indonesia could be "marginalized", given the fixed asset allocation that many western portfolio investors assign to Asia. "You have a shrinking pool of money that has to be allocated, especially after the crisis," he says.
Chua also questions the sustainability of Singapore's economy in the context of southeast Asia's progress as a whole, comparing the island state to "a five-star hotel in a ghetto". It is necessary, he says, "to re-examine southeast Asian growth vis-à-vis the rest of Asia and the rest of the world. Post-crisis, all of us are trying to think of a role".
Malaysia's stock market is likely to be "volatile and unpredictable," concludes Chua. It looks set to suffer a tougher year than last. "The fundamentals were at their best last year, especially in the first half coming out of the recession," says Jason Chong, head of research at Merrill Lynch affiliate, Smith Zain Securities. "Earnings were above expectations and market valuations were also cheap relative to their historical performance." On top of that, Malaysia was expected to be reinstated into the MSCI Emerging Markets indices come June. The market peaked in February last year, just breaking the 1000 barrier. Since then the trend has been down, and it ended the year at around 680.
"What went wrong?" asks Chong. "People were not focusing on the fundamentals per se, they were looking more qualitatively. Definitely fundamentals are not going to be as strong as last year. I cannot see any positive catalyst right now. The market will be driven by events and will be dependent on corporate announcements." A global economic slowdown could also hurt the domestic economy.
How much it might be affected is a matter of debate. The US accounts for around 10% of Malaysia's exports, says Nasir at Maybank. He believes a hard landing in the US, would be "big enough to make a dent" in Malaysian exports. But a senior executive at another broking firm says: "On a regional perspective, I am fairly positive we have come out of the recession. Most of Southeast Asia will be fairly isolated from the slowdown expected in the US. Malaysia is insulated to a certain extent because of the pegged currency, but corporate governance is not as good as it could be. Malaysia puts its own internal policies ahead of international policies. The number one goal is protection of its own market."
Foreign investors still nervous
Corporate governance is a recurring theme in discussions with brokers, as is the marked shift in emphasis from foreign to local investors. Smith Zane's Chong has noticed a fundamental change in investor attitude. "In presentations to local clients in the past, they always looked to foreign investors as a catalyst to re-rate the market," he says. "We cannot assume that foreigners will come back to Malaysia and, as local institutions, these guys will have to take the lead in setting market direction. We are now in a period of transition. Foreigners are selling out of Malaysia, but for every seller there must be a buyer. We are going through this transfer of ownership stage, there is digestion and only after that can the market move up on a sustained basis." He cites net foreign portfolio inflows peaking in early June at M$8.6 billion ($2.26 billion), followed by net outflows, which hit M$7.5 billion in October.
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