If you’re hoping for a sexy investment story from Malaysia this week, I’m afraid I’m going to disappoint you. For several weeks, the news in Kuala Lumpur has simply been about sex.
There’s a video doing the rounds that shows a man resembling opposition leader Anwar Ibrahim in a hotel room with a woman who is not his wife. His opponents are using it as evidence he’s an adulterous hypocrite. Anwar claims it’s a cheap attempt to smear him. Both allegations may be true.
It’s all highly entertaining. But it’s really not good for Malaysia. It’s yet another case of this promising investment story being blighted by awful politics.
When sex scandals become predictable
Sex scandals and Anwar are nothing new. You may already know he’s currently on trial for sex with a male assistant. This case is known as “Sodomy II” locally, because Anwar was tried and convicted of the same offence (with a different assistant) in the late 1990s. He was subsequently acquitted on appeal.
There’s a strong suspicion that the charges are politically motivated and possibly outright fabricated. Not least because, while homosexuality is illegal in Malaysia, in practice prosecutions are rare.
The appearance of the video rather adds to this impression. “They’re determined to get him on having sex with something,” one friend put it. “Couldn’t they be more imaginative this time?”
This may make Anwar sound like a political martyr, a promising reformist squashed by the Barisan Nasional, the governing coalition that has been in power without interruption since independence.
That’s not really true. Anwar is a former deputy prime minister whose first trial came about after he fell out with then Prime Minister Mahathir Mohamad.
His conversion to a reformist opposition figure is unconvincing. Given his track record I have little doubt he would be far worse for the country than current PM Najib Razab.
Nonetheless, his opposition alliance gave the government a nasty scare at the last general elections in 2008. So it’s understandable that his opponents are trying to discredit him – but that’s a mistake for two main reasons.
Malaysia’s image has been improving – this nonsense could damage all that
First, the entire affair is a national embarrassment. It’s more worthy of a banana republic than a country that has ambitions to be a developed nation within a decade. And it distracts from the improvements that Malaysia has shown even over the last couple of years.
Lately, some politicians have clearly realised just how much Malaysia has slipped in the last decade or so – it’s well behind Singapore, and is also threatened by the rise of China. So we’ve seen attempts to increase investment in crucial areas such as infrastructure, and to dismantle some of the policies that discriminate in favour of ethnic Malays and against Chinese and Indian Malaysians.
As a result, there’s been a shift in the way that foreign investors see Malaysia. Two years ago, I talked to managers who saw little appeal in this market and felt that talk of changes were just empty promises.
A year ago, the same managers were starting to sound keen on the macro story, but could find few attractive stocks. More recently, with the market continuing to perform well, their Malaysian weightings had begun to grow regardless of earlier grumbles – they now feel they have to participate.
But when the mood starts switching like this, I question whether the reality matches up to the story. At best, Malaysia is still at the start of getting back on track. More reforms and more investment are needed.
The big question is whether these promising moves will lead as far as we expect. And ridiculous political scandals like this could cause more investors to ask the same question.
The second problem – the government may just cling to power
The second problem is that attempts to discredit opposition politicians in this way show that the government’s only goal is to retain power for its own advantage (such as the ability to channel cement contracts to your cronies).
There is absolutely no doubt that this goal applies to large swathes of the BN’s incompetent and corrupt line-up of MPs. The question is whether key figures have the ability to push through necessary reforms, even though they may sometimes undermine their prospects of re-election.
During my trip, I ended up at a lunch with a couple of financial consultants and an aspiring MP for the opposition, who were discussing exactly this. The financial people were encouraged by what PM Najib has done. So far he’s sounding the right notes as far as investors are concerned.
The politician was a lot more circumspect. He agreed that Najib was talking along the right lines. But he questioned how much progress had really been made, and whether Najib had the clout to push through everything that needs to be done in the face of opposition from within his own party.
So there’s a real risk that reforms could once again lag. The BN performed relatively poorly in the elections this week for the state assembly in Sarawak, a key stronghold – especially in Chinese majority areas.
Some politicians will use this to argue that there’s no point in trying to be inclusive and the BN should concentrate on pro-Malay policies to shore up its base among the majority ethnic group. This is exactly the wrong thing to do for Malaysia’s long-term development.
Be cautious after a strong performance
Let me be clear. I’m not suddenly very negative on Malaysia. The country has a great deal going for it. The jury is out on whether it will do as well as it could. But it doesn’t need to get everything right to deliver good returns for investors.
My main worry is that sentiment has changed a lot on Malaysia in the last year or so. But progress may be slower than many investors are hoping. The poor performance of India over the past few months shows just what happens when the reality of local politics collides with outsiders’ perceptions.
So after a good couple of years, it wouldn’t surprise me if Malaysia disappointed for a while. But it still offers some interesting long-term investments. In Kuala Lumpur, I caught up with Manraaj Singh, a former editor of MoneyWeek’s Profit Hunter newsletter. He’s putting together a hedge fund at present, and we talked about a few local stocks.
At the conservative end, we both like Public Bank (MK:PBK), which despite its name, is a fully private company. Often viewed as one of the best-run banks in the world, it focuses on retail banking and small- and medium-sized businesses. It’s solid and dependable rather than strikingly exciting. But if you want a very high-quality name that should do well if Malaysia does, I can’t think of a better candidate. It’s on a price to earnings (p/e) ratio of 14.3 and yields about 4.5%.
For a slightly different twist on banking, CIMB (MK:CIMB) is interesting. Although mainly a Malaysian business, it’s been buying up smaller banks in other south-east Asian countries such as Thailand and Indonesia. Over time, I expect banking in this part of the world to consolidate into several regional groups, with Malaysian banks likely to be among the major acquirers. It’s on a p/e of 16.8 and yields 3.2%.
On the racier side of things, Manraaj points to some prospects in three local oil and gas juniors: Kencana Petroleum (MK:KEPB), SapuraCrest (MK:SCRES) and UMW Holdings (MK:UMWH). All three are well-connected firms that have landed contracts from national oil company Petronas for marginal oil fields: ones that don’t make sense at low oil prices but are worth exploiting today.
Manraaj notes that they’ve had a strong run-up lately, so a short-term spike is unlikely. But he thinks they are a very interesting long-term oil play – although I would add this is definitely an area for the more adventurous investor.
Unfortunately, none of these has a foreign listing. Malaysian stocks are not as hard to buy as Korean or Taiwanese ones, but they’re not yet available through the discount brokers such as TD Waterhouse, Saxobank or Interactive Brokers that most UK readers use for international investor.
The best UK brokers with a strong international dealing division will offer them, such as Killik & Co or Brewin Dolphin. Alternatively, opening an account with a good Asia-based broker, such as Hong Kong’s Boom or Singapore’s OCBC or Phillip, will give you access to most regional markets.