Investors in Malaysia remain cautious despite Mahathir win

Investors in Malaysia remain cautious despite Mahathir win

KUALA LUMPUR (Dow Jones): Prime Minister Mahathir Mohamad's election victory may boost investors' confidence in the government, but foreign fund managers say they are unlikely to rush back to the Kuala Lumpur bourse.

The National Front coalition's win may be reassuring, but fund managers remain concerned about the uncertainty over Mahathir's eventual successor and the political transition process.

"Malaysia hasn't resolved the issue of political transition, although (the vote) does confirm the government in power," a Singapore-based chief investment officer at a European fund management company said. "It has removed some uncertainty, but it hasn't answered the real question."

Chew Ping, associate director of sovereign ratings at Standard & Poor's in Singapore, said, "Our concern is the leadership transition post-Mahathir."

After a tough campaign, Mahathir's coalition retained the crucial two-thirds majority in Parliament needed to amend the constitution, capturing 148 of the total 193 seats.

A simple majority for Mahathir's election victory would have come as no surprise, but few expected him to retain the full- fledged two-thirds majority in Parliament, fund managers said.

The victory might be viewed by some as vindication for Mahathir after his firing of ousted Deputy Prime Minister Anwar Ibrahim and the imposition of controversial capital controls in September 1998.

"Compared to a month ago, I think the government has done better than expected," said the chief investment officer at a European fund management firm, "and that's positive for the market."

The Kuala Lumpur bourse, however, languished Tuesday after a 15-minute morning rally, which boosted the Kuala Lumpur Stock Exchange Composite Index by as much as 1.2 percent. The index ended the day down 1.5 percent, or 11.25 points, at 734.66.

Uncertainty over the new cabinet lineup, which is expected to be unveiled within the next few days, and the implications of the Islamic Party's control over the Northeastern states of Kelantan and Terengganu weighed on sentiment, stock watchers said.

The Islamic forces have taken a stronger hold than we originally anticipated," said an institutional sales trader at a European broking house.

The Muslim-based Parti Islam Semalaysia, or PAS, gained ground in Monday's election. The opposition party retained control of the Northeastern Kelantan state government and wrested control over Terengganu from the United Malays National Organization, the dominant party in Mahathir's coalition.

But the market overreacted on fears of possible Islamic revivalism, and radical changes in government policy are not expected, most fund managers said.

With the National Front's majority win, "we don't see a big change in policy," said Chew at S&P.

Fund managers said they are waiting to see whether Mahathir will strengthen his grip on power in the wake of the elections. They would be favor a more conciliatory and moderate approach, they said.

"We're waiting for the pronouncements on the make-up of the new government ...," said Hugh Young, a director at Aberdeen Asset Management. "We want to see how Mahathir reacts to victory."

Second Finance Minister Mustapa Mohamed's election loss in his home constituency in Kelantan isn't especially worrisome, as Finance Minister Daim Zainuddin has retained his seat in Merbok, in the northern state of Kedah, fund managers said. It is unclear whether Mustapa will remain in cabinet, although he can be appointed to the Senate, which would allow him to retain his ministerial position.

With the election out of the way, the Kuala Lumpur bourse is likely to remain sluggish in the coming month, fund managers said. Trading is likely to be subdued with year-end inertia as foreign funds close their books, and amid concerns of possible Y2K glitches, fund managers said.