the FT’s comments

Yesterday’s Lex column in the Financial Times points out a certain lack of enthusiasm by foreign investors about holding Malaysian stocks.  Lex suggests that this is because Malaysia has nothing really special going for it, in the way China or India do.

my recollections

That may well be part of the reason for this coolness, but I don’t think it’s anywhere near the whole story.  Here’s what I think:

1.  Let’s start with the observation that Malaysia is a very small stock market.  No foreign portfolio manager needs to own Malaysian stocks, unless he has an extremely restricted mandate, say, ASEAN or Malaysia itself.  Generally speaking, however, as more emerging countries have opened their markets to foreigners, investors have tended to look for investment vehicles with wider mandates, not narrower ones.

2.   As the Asian economic crisis spread to Malaysia from its origin in Thailand in 1997, the empires of highly financially margined but politically well-connected Malaysian magnates began to slowly collapse from the combination of a plummeting stock market, a declining currency and higher interest rates.  Not only would these prominent figures be ruined by a continuation of the situation, but decades of government effort under the New Economic Policy and the Industrial Coordination Act to shift more of the country’s wealth into the hands of the ethnic Malay majority (known as the “bumiputra” program) would have been reversed.  So in September 1998, Malaysia imposed capital controls.  (this is kind of like today’s Ireland story, only in this version the government rescues the real estate speculators by leaving the euro and declaring martial law.)

There has been vigorous academic debate since then as to whether this action had a positive or negative effect on the subsequent course of the economy.  From a foreign portfolio investor point of view, however, the decision was unambiguously horrible.  It meant that his investments were frozen in place.  He couldn’t sell his Malaysian stocks and repatriate the proceeds.

What a mess!  What an embarrassment!  For a corporate investor building a plant in the country, the asset freeze may have had no practical consequences.  Not so for an institutional equity investor.   He would have to disclose to clients that their Malaysian holdings were now illiquid.  Pricing would become a constant issue.  Suppose a client wanted his portfolio liquidated and turned into cash in his home currency.  The Malaysian portion would have to be paid in kind, not a welcome result.   Portfolio managers would have to explain at every meeting with existing or prospective clients how and why he had been so maladroit as to be caught out this way.

The damage to a professional reputation from being in this situation would far outweigh any possible gains that might have come from holding a small Malaysian equity position.  Managers, or at least their supervisors, have long memories.  I think anyone who witnessed the capital control imposition would have a hard time taking the risk of going back into Malaysia, or allowing any subordinate to do so.

3.  Malaysia was a much scarier place to be during the Asian crisis than I think many remember.  The anti-Semitic leanings of Dr. Mahathir, the prime minister, became known to the world as he blamed the economic trouble on a cabal of Jewish financiers led by George Soros.  Mahathir relieved his deputy in charge of economic policy, and his presumptive heir, Anwar Ibrahim (who apparently opposed capital controls), of his job.  Not only that, Anwar quickly found himself accused of corruption and then tried and imprisoned for allegedly forcing his limousine driver to have sex with him.

Foreigners in Malaysia, especially Americans, feared for their physical safety–whether they had real reason to or not.

In summary, I think Malaysia still suffers from the “fool me once, shame on you; fool me twice…” syndrome.  Just writing about it gives me the shivers.

At some point memories will fade.   But absent a something-special that, as Lex points out, Malaysia doesn’t seem to have, that won’t be for a long time.  probably not until everyone who lived through (and survived professionally) the capital controls episode–or, like me, was luckily watching from the sidelines–disappears from the investment management industry.