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Economic News

22 Jul 2010
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With a crop of healthy looking financials behind them, Malaysia's share prices have been booming in recent times. Monday saw a six-year high broken on the stock index - but the national currency, the ringgit, outdid even this performance by breaking an eight-year record appreciation the same day.

Late on May 8, the ringgit rose to RM3.5930 to the US dollar, its highest point against the greenback since 1998. At the same time, the weighted Composite Index of 100 blue chip stocks in Kuala Lumpur finished up 0.5%, or 4.52 points, at 965.90.

The immediate cause for Monday's surge was an announcement on a major state development plan for the southern region of Johor, which boosted interest in construction stocks linked to the government. Clearly, there are some less coincidental reasons behind the recent surge, but it certainly didn't hurt to have a good relationship with the region in question.

In particular, the government controlled UEM Group's stocks jumped, as the company is one of the main beneficiaries of the RM10bn ($2.79bn) allocated under the country's Ninth Malaysia Plan (9MP). UEM World Berhad jumped 35.1% on Monday to RM2.08 ($0.58) a share, while UEM Builders jumped 13.7% to RM1.33 ($0.37). The majority of the developments allocated under the Johor development plan are located on the Bandar Nusajaya property in the south-east of Johor state, owned by UEM.

Bandar Nusajaya is an epic project, with the aim of no less a thing than the construction of an entirely new city. The master plan envisages a conurbation of some 600,000 people by 2020, on a 9700-ha site. Residential, industrial and public areas are all present, with a promotional brief emphasising the naturalness of this manmade wonder. The site's location - next door to Singapore - is also hoped to be a key selling point for investors and residents.

The city is the principal project of UEM Land, a wholly owned subsidiary of UEM World Berhad. The land company has four subsidiaries - Bandar Nusajaya Development, Cahaya Jauhar, Nusajaya Development and Mahisa.
At the same time, another firm to see its share price jump in recent days was transport MMC Corp., which saw a huge volume of trades - 11.8m shares on Monday - lift the share price 10.2% to RM3.68 ($1.02). MMC Corp has a virtual monopoly on Johor state's seaports.
The share price jump was thus to be expected, especially as the prime minister himself has endorsed MMC's likely gains. Prime Minister Abdullah Ahmad Badawi says the plan is for Johor to become a transport hub on land too, with an ambitious infrastructure development plan, including a high-speed rail link to Kuala Lumpur.
Other real estate and construction stocks have also been beneficiaries recently, mostly, analysts say, because of a fundamental asset-reflation going on at present, the result of the appreciating ringgit.
Yet this boost in value against the US dollar does not seem to have done Malaysia's exports too badly. The latest state Statistics Department results for March showed exports jumping 21.3% month on month. The main traders here were electrical and electronic goods - with exports of these totalling RM24.53bn ($6.85bn) - and crude oil, at RM3.11bn ($87m). The March figure of RM51.28bn ($14.32bn) in total exports was the highest monthly figure on record.
As the economy expanded, naturally enough, imports did too, jumping 19.5% month on month during March. Yet the total - RM41.69bn ($11.64bn) - still made for a trade surplus of RM9.59bn ($2.67bn). This was far from anything new, however, as it represented the 101st consecutive month of trade surplus for Malaysia, an unbroken record stretching back to November 1997. The appreciating ringgit may mean costlier exports, but it also means cheaper imports, dampening any inflationary pressures. The fact that most listed companies in KL cater largely to the domestic market also helps insulate the exchange from any negative effects of export price rises.
Unsurprisingly then, the country's stock market is now acting as a magnet for many overseas investors, who are moving away from other regional indexes in Japan, India, China and Singapore to the more lucrative fields in KL.

This is not because of any great historical record on the KL Composite - Japan's Nikkei Stock Index has risen some 53% in the past 12 months, for example, while on the KL exchange, the figure for the same period is just 6%. It is rather because Malaysian stocks generally trade at much lower multiples and offer higher dividends. The price-to-book ratio of the top 100 companies on the KL exchange may not have altered much in the last few years, but the return on equity is around 68% higher than the companies' 10-year average. At the same time, the currency moves are also a big attraction, strengthening appeal by building in gains from currency appreciation into any share deal.

How long the process will continue is - as ever - the big question. But with the basis of the stocks boom looking fairly sound, there is likely a lot further to go. The ringgit may indeed have some catching up to do in its appreciation against the dollar, as many other south-east Asian currencies have been appreciating against the greenback for years. Thus most analysts are confident that the race upwards is still on.

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