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November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

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DECEMBER 10, 1999 VOL. 25 NO. 49

Looking at Malaysia
Why this fund manager is still staying away


photo
Julian Mayo has yet to return to Malaysia despite Prime Minister Mahathir Mohamad's easing of some capital controls. But he sees one good stock there: Telekom Malaysia
photo: Alexandra A. Seno for Asiaweek
 
Before the Asian Crisis, Julian Mayo used to have quite a bit of money in Malaysia. Those funds were pulled out even before Prime Minister Mahathir Mohamad imposed currency and capital controls in 1998. Mayo, who is the Hong Kong-based managing director of Regent Financial Services, has yet to re-allocate a portion of the firm's $1 billion under management for Malaysian investments. But he keeps tabs on the economy and local companies. Mayo, 38, spoke with Asiaweek's Alexandra A. Seno.

What will it take for Malaysia to return to your buy list?
We need to see an improvement in the domestic fundamentals. We'd like to see removal of all the restrictions. [Capital controls were partially lifted this year.] We'd also like to see more liberalization. Malaysia is still over-banked and there are still too many financial services entities. I'm not sure the enforcement of mergers is the right way to go about it. You should let the markets make the decisions. Another issue is the restrictions on foreign ownership.

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I'd like to see the currency floated. Too many policy-makers around the world, not just in Malaysia, concentrate on currency as a tool, as a means of gaining advantage over someone else. If you fix the currency, pressure in the economic system comes out elsewhere - financial assets, property or other real goods. One of the most obvious lessons I learned from the 1997 crash in Asia is that quasi-fixed currencies do not work.

Also the government has sent ambiguous signals as to whether or not it wants foreign investors. It's very difficult if you're managing a mutual fund and you decide to have money in Malaysia. If stock prices suddenly double, you decide to take the money out. Is that good or bad? I think it's good because you're creating wealth for your investors, you're providing a market environment where people can get out when they want. You can't say all short-term flows of money are bad. The more barriers put up against our doing our job as fund managers, the more difficult it is to think of Malaysia as an attractive place.

But isn't the Malaysian economy recovering nicely?
You have to factor in a great deal of risk for Malaysia compared with elsewhere in Asia. Inflation, for one, because of the fixed currency. Another risk is domestic consumers feeling too wealthy. Next year we may see export growth decline and imports going through the roof. We're seeing the benefits right now of last autumn's interest-rate cuts in the U.S. and we have not yet seen the costs of a slowdown [after rates were raised three times this year]. The world economy will be a slower place this time next year. Even though Malaysia is justified in proclaiming that it's economy is great (GDP growth is 8.1% for the most recent quarter), you can point to similar if not better results elsewhere in Asia. Thirteen per cent in South Korea, for example. Even Hong Kong, which has been flat on its back the last couple of years, has registered a growth rate of 4.5%. The Malaysian recovery is more a matter of good fortune than necessarily good economics.

What do you think of Prime Minister Mahathir's election triumph last week?
Our view is that the system of government which has run Malaysia in the recent past will continue to run Malaysia in the future. It's business as usual. There will be no change as far as we can see. The results are not going to cause a change in the way Malaysia is run. There would have been huge implications if [the election results were different] but there hasn't been a change.

Are there stocks worth buying?
Telekom Malaysia. What makes it interesting is its strategic links to the growth industry of the moment, telecom and potential Internet applications. This will be the first port of call for people looking to exploit Malaysia's Internet capabilities. The country has always been an enigma in this case. It has high levels of competence and awareness. There are people who would embrace the Internet and the benefits it gives. But at the same time the government puts controls over some aspects of the media. The Internet will undoubtedly change the way business is done in Malaysia. Telekom Malaysia is one of the top companies best positioned to take advantage of this.

What about export plays?
In theory the sector is strong because of the currency. But that brings about one of our problems about investing in Malaysia: it is difficult for us to find good stocks which are relatively cheap at the moment. It is difficult to find value.

Can you see a return to the kind of enthusiasm for Malaysia that international investors exhibited four years ago?
Five years or so from now, the good old days of people throwing money blindly into the market may come back. The removal of barriers and the re-entry of the country in the [benchmark] MSCI indices next May will be positives. People who have to be investing in Asia will have to be [in Malaysia] because it is a fairly large economy and there are good businesses there. People have always had a black-or-white view of Malaysia, but the fact is that the difficulties of doing business there are not much different from elsewhere in Southeast Asia. It's just that Malaysia's leader has a higher profile than [those of] its neighbors.

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