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ethnic Malays was repealed.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.
Dr Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of Technology and The University of
Michigan, has researched and taught at universities in the United States,
Canada, France, Switzerland, and Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian Studies, Carleton University,
Canada, he also consults privately in a variety of fields.
(Copyright 2010 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road,
Hua Hin, Prachuab Kirikhan, Thailand 77110
