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Economics & Strategy

Currency and domestic political upheavals

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ECONOMICS & STRATEGY
(for the week of 8-12 June 1998)



Currency and domestic political upheavals

A slew of bearish news descended on the KL market last week, including a possible country downgrade by Moody's, a weaker Japanese yen and ringgit - all precipitating the sharp fall in several index-linked stocks on Friday. That include Tenaga Nasional. Petronas Gas, Telekom and Tanjong plc. The Index settled at 505 pts, which broke through our crucial envisaged support of 511 pts.

Further country downgrade: Malaysia's 1Q growth of -1.8% has drawn reprisal from Moody's Investor Service, which has put the country's foreign currency ceiling for bonds and notes, as well as bank deposits on review for possible downgrade. The rating firm currently has a A2 for bonds and notes, with bank deposits having a Baa1. The government's Eurobonds, as do Petronas, Telekom and Tenaga Nasional's ratings, are also on downgrade alert.

Currency in focus: The Indian rupee and the South African rand tumbled to record lows and the Pakistani rupee sank to near historic low. The Japanese yen persistently weakens by the day. The wobbly currencies are exacting its toll on stockmarket in emerging markets. One could be forgiven for thinking the foregoing was a script from the past. But it all happened only last week.

Political crises in DAP and MCA: It looks like not only the Umno leadership is showing signs of cracks. The suspension and removal of three Democratic Action Party stalwarts within the party last week raised some eyebrows in the local press.

The Malaysian Chinese Association last week announced the resignation of politician-cum-businessman Soh Chee Wen from all party posts. More recognised for his forays into such dubious companies as Promet, Autoways, Kelanamas, Perstima, Uniphoenix and Omega Holdings, among others, his resignation appears to be a purging of "bad elements" that could jeorpadise the MCA image and undermine its credibility. Soh is also linked to the MCA president's son in deals relating to the sale of loss-making Rekapacific Bhd.

Thoughts on valuation of Malaysian stocks: Views on long term investing in Malaysian equities can be broadly categorised into two camps. Optimists backed by historical data say that once the economy bounces back to achieving real GDP growth of 6-8% p.a., valuations will be 20-24x based on one-year forward PERs and market capitalisation over nominal GNP will range from 2-3x following the trend between 1992-97. On the other hand, hard-headed investors do not feel compelled to pay up because they feel minority shareholders' interests have not been rewarded, appreciated or adequately protected. The examples are well known: United Engineers' purchase of 32.9% of Renong (which not only affected UEM but also subsidiaries like Kinta Kellas and CIMA), Resorts World's subscription of new shares in Lim Goh Tong's Star Cruises plc and the MISC's acquisition of Konsortium Perkapalan's shipping assets for cash.

A more recent phenomenon is the "revision" of the terms of profit guarantees by some of companies like Hiap Aik Construction (deferment of profit guarantee), ACF Holdings (cancellation of guarantee due to change of ownership) and Suremax Group (revision in terms of guarantee from a per annum amount over 3 years to a cumulative figure over 3 years). This throws into question the meaning of the word "guarantee."

What's ahead: It is not so clear if all these events have already been fully reflected in stock valuations. Our guess is that even if the economy recovers, Malaysia could lag in terms of stock price performance as foreigners may want to see evidence of gains to minority shareholders before committing new investments here. The biggest risk now is the use of funds from the Asset Management Company to "rescue" assets of distressed listed companies. Rumoured candidates include 20% of PLUS and the Second Link project from UEM and Time Telekom from Time Engineering. While minority shareholders would be protected, the same cannot be said for the shareholders of AMC.

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