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Economics & Strategy

Market to drift lower due to Yen and local corporate factors

 


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ECONOMICS & STRATEGY
(for the week of 13-17 April 1998)


Market to drift lower due to Yen and local corporate factors

It was another quiet week on the KL Stock Exchange with the benchmark KL Composite Index closing 1% higher at 673.14 pts on Friday. There were three major policy announcements last week: the implementation of equal access in the telecommunications sector, relaxation of the bumiputera equity policy and easing of lending curbs to the automobile sector.

Telecom sector "liberalisation": The implementation of equal access, will be available to the public as planned from Jan 1, 1999 according to a statement by the Minister of Energy, Telecommunications and Posts last week. First announced by the government in May 96, equal access enables fixed-line telephone customers to dial through different phone companies irrespective of the network they are directly connected to. This means more competition for the incumbent, Telekom Malaysia who will have to battle Binariang, Technology Resources Industries, Time Telecommunications and Mutiara Swisscom for a share of the fixed-line market. But we think the term "liberalisation" has been rigged in favour of the incumbent as the "government will impose a floor on call charges."

But whether consumers will truly gain from such stipulation is open to debate; setting the floor on call charges simply means the market at large will be deprived of the benefits of the full force of price competition among the service providers. The statement also confirmed analysts' expectations that Telekom will be insulated to some extent from the full force of open market competition.

Does bumiputra policy amount to "1+1=3" strategy? On Friday, Deputy PM Anwar Ibrahim said that the decision to allow non-bumiputra and foreign investors to buy equity in companies previously reserved for bumiputras will be made a permanent government policy. It would have been crystal clear if he had left it at that. But he went on to say that the government remains committed to maintaining bumiputras' share of the economic cake at 30%, at least. To be sure, the issue is academic thus far as we have yet to see any rescue jobs by non-bumiputra companies.

NEAC makes first policy announcement: The National Economic Action Council (NEAC) announced over the weekend that the loan limit for cars costing RM40,000 and below would be raised from 70% to 85%. In addition, the lending limit for the total amount of car loans to be issued by financial institutions has been set at RM15bn. This will clearly benefit national car makers and distributors like Proton, EON, MBM Resources and UMW Holdings. It could also have some spill-over effects on the second-hand car market, which has been badly hit by the tight liquidity and poor consumer confidence. The council has also waived the ruling requiring foreigners who intend to purchase houses worth RM250,000 and above from obtaining the permission of the Foreign Investment Committee. The move is a silent acknowledgment that the property sector will be badly affected by the current slowdown.

Watch US dollar-yen exchange rates: On the regional front, we interpret last week's surge in the Japanese yen against the US dollar as a temporary bounce rather than signalling a fundamental improvement of the economy. According to the Asian Wall Street Journal, Japan's central bank sold more than US$5b in an around-the-world currency-market intervention between Thursday and Friday. Some traders expect the US dollar to rebound this week, which could put a damper on regional sentiment. A weak yen dampens Japan's ability to import which would derail hopes of an export-led recovery by many Asian nations, Malaysia included.

Market direction: We expect the market to drift lower this week due to possible Yen weakness and con-cerns over corporate exercises by troubled Malaysian companies. The KLCI could test the 657 pts support level - which is the low since the post Gongsi-Raya holiday rally on Feb 3. The number of suspended compa-nies is probably close to an all-time high. Loss-making concerns such as Wembley, Aokam Perdana, Bescorp Industries, Repco, Wing Tiek, Westmont Industries and Esprit Group have been suspended, pending some form of restructuring to pacify creditors. Ting Pek Khiing has also requested that shares of Ekran, Granite and PWE Industries be suspended, we suspect because of problems in Wembley. The next round of market moving news could be outright rejection by creditors of some restructuring proposals which would then lead to receivership or liquidation.

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