Thursday, September 2, 2010

Malaysia reaps reform benefits

Malaysia reaps reform benefits
By Robert M Cutler

MONTREAL - When Najib Razak took over as Malaysia's prime minister at the beginning of April last year, following the election victory of the United Malays National Organization (UMNO), the country's main
stock exchange index KLCI stood at 901.

Within three months of coming to power, Razak's government liberalized curbs on foreign ownership and foreign direct investment, including important changes in rules on stock ownership and foreign acquisition. For example, among many reforms, fund management companies may now be 100% foreign-owned, and a previous 30% minimum ownership condition for ethnic Malays was repealed.

It is perhaps no coincidence that the Kuala Lumpur Composite Index (full name, FTSE Bursa Malaysia KLCI, and based upon the share prices of the 30 largest companies by full market capitalization) reached a 30-month high this week, closing on Thursday at 1,435. The current advance represents an increase of more than 58% in 17 months.

This performance would appear to be mania if the fundamentals were not so encouraging. Gross domestic product (GDP) increased 8.9% in the second quarter year-on-year, nearly the fastest in a decade, after a 10.1% first-quarter improvement.

On June 10 this year, the government published its Tenth Malaysia [Five-Year Economic] Plan, based upon the New Economic Model (NEM) formulated the previous year. The NEM's basic components were to re-invigorate the private sector, creating a competitive domestic economy; to improve the quality of the workforce, while modifying affirmation action policies in a progressive manner; to streamline the public sector, making it private-sector friendly; to establish the foundation for a knowledge-based infrastructure; and to ensure the sustainability of growth, while enhancing its sources.

In keeping with those general precepts, the Tenth Malaysia Plan gave particular attention to developing the electrical and electronics sector, financial services, “green” technology, "high-value" agriculture, information technology, oil and gas, palm oil, and tourism as drivers for continued growth.

In line with the new economic direction, exports of oil and electronics increased dramatically as did domestic spending. Absolute growth may exceed 6% during the present calendar year. The ringgit, the national currency now at a 13-year high, "is the top performer in emerging Asia year-to-date", according to Dariusz Kowalczyk of Credit Agricole CIB in Hong Kong, as quoted by Bloomberg News.

The country is now making the attempt to become a high-income economy. In order to avoid the so-called "middle-income trap", it is seeking to emphasize the service sector and also domestic consumption as potential new drivers of growth, replacing dependence upon exports and manufacturing. Private consumption now represents over half of GDP, up from just over two-fifths a decade ago.

The benchmark stock index is now not far from its historic high notched on January 11, 2008, at 1,516, and with continuing favorable short-term technical indicators and impressive volume. It breached an important long-term resistance at 1,391 and another at 1,415 with no apparent problem (although it would be reassuring if the KLCI weakened a bit to test them from the upside, in order to confirm at least one of them as a support).

This is one of the few Asian equity averages that is not at least threatening to breach to the downside its medium-term ascending-bottoms up-trend, begun earlier this year. And unlike many of the major national equity indexes that I cover every week in the Market Rap feature on this website, the KLCI did not even have a trading range over the past 12 months.

The case could be made that there were two consecutive, upward-staggered short-term trading ranges, first from October last year to mid-March this year, and then from mid-March to late July. In the long term, however, these formations dissolve into a single ascending-tops uptrend, through which it has spectacularly broken further to the upside just this past week.

It would be reassuring if the KLCI slowed down. Its chart since the third week of May will risk beginning to look a bit "parabolic", that is, becoming steeper ever faster - a standard signal that it would be setting itself up for an equally steep fall. And yet, the technical strength is undeniable and evident in nearly every available indicator. There are no evident fundamental weaknesses that would suggest a collapse, although there is a consensus expectation for general moderation of the growth performance during the second half of the present calendar year.

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