On October 22, shares on the Bursa Malaysia declined in line with other Asian stock exchanges as fears of a global economic slowdown and lower commodity prices weighed heavily on the stocks. Nevertheless, the Malaysian stock exchange performed better than many in the region, reflecting its relative maturity.
On the same day, the US stock market fell 5.7%, demonstrating renewed concerns that the financial turbulence that has beset the world's largest economy - and many others in the West - is far from over.
Malaysia's benchmark Kuala Lumpur Composite Index (KLCI) lost 13.88 points (1.51%) to close at 904.28, down further from a 28-month low of 931.79 on October 10, and almost 60% down on the 12-month high of 1516.22 on January 11.
The KLCI's decline has been led by falls in key financial stocks. Public Bank fell 20 sen to RM8.70, Bumiputra-Commerce dropped 30 sen to RM7.05 and Maybank shed 10 sen to close at RM5.30.
Overall, the Finance Index lost 156.30 points to 6982.20, reflecting anxiety about the impact of the international financial crisis on Malaysia. The country's banking sector is currently relatively liquid and does not have a great deal of direct exposure to the toxic assets that have damaged American and European banks. But there is concern that Malaysian lenders may find it harder to access capital overseas, although the country's banks do have access to retail deposits, with savings much higher than in the West.
The expected slowing of broader economic growth within Malaysia as a result of global conditions seems likely to put a drag on the banking sector's expansion. As economic circumstances tighten, there may also be an increase in the number of non-performing loans (NPLs).
"The typical six months lag effect of higher NPLs and slowing loans growth ultimately feeding into banks' earnings during an economic slowdown will point towards greater earnings risk for our banks in 2009," an unnamed analyst from OSK Investment Bank told the local press.
Falling commodity prices have also had their effect on the stock exchange. The price of crude oil, one of Malaysia's key exports, has fallen from more than $140 a barrel in July to below $70 in October. This has eased the country's inflation outlook - a major concern - but could hit external earnings, therefore adversely affecting the economy as a whole.
The drop in crude has also dragged down the price of palm oil, which had previously soared, partly because it was seen as a possible substitute for petroleum (the other key reason being increased supply of other edible vegetable oils). Palm oil futures for January fell to a two-year low of RM1565 ($434) per tonne on the Bursa Derivatives, down from RM4486 ($1245) in March. As a consequence, by October 22 the Bursa's Plantation Index had fallen to 3800.03, down 122.69 points on the day.
Despite the recent falls, however, the Bursa's longer-term outlook is still thought to be positive. It seems likely that the exchange will recover from its current buffeting by international financial storms, and there are still opportunities for long-term strategic investors.
"Our market is considered oversold," one unnamed share dealer told the local press. "There are plenty of quality undervalued stocks ready to be grabbed. It is just the gloomy global outlook that is holding back investors from investing heavily in our market."
According to the Malaysian Institute of Economic Research (MIER), the economy is expected to grow at a steady 5.3% in 2008, thereafter dropping to a more sluggish 3.4% next year. The government, meanwhile, forecasts that growth will top 5% both years. Even if there is an economic slowing, it hardly constitutes a disaster on the scale of the 1997 Asian financial crisis.
Recent drops in the KLCI reflect the reversal of a partly speculative price spike in commodities as well as cautiousness towards the financial sector. The former could arguably be beneficial in the medium to long term, as it has also eased inflation pressures and should put the Malaysian crude and palm oil sectors on a steadier growth path.