Malaysian stocks have risen to their highest levels in ten years over the last few weeks, with the KL Composite Index breaking out of its 850-950 trading range established in mid-2004, and rallying to more than 1,120. A variety of reasons have been given for why it's managed to do this, such as restructuring of government-linked companies (GLC) by state investment firm Kazanah. But there are a variety of other factors that make me believe Malaysian stocks can rise further, and sustainably.

Here's why:

First, Malaysia is now seen as a safer investment destination than its neighbor Thailand. People who previously mocked the Malaysian way of doing business, such as cronyism and for domestic political reasons, now have a much worse example to point at. Thailand has gone from the sublime to the ridiculous, replacing a leader who knew what he was doing, although it apparently benefitted his own family's pockets, with a leadership that is trying to work hard for the good of everyone, but doesn't seem to know what it's doing. The evidence for these two points can be found in the recent imposition, and subsequent retraction of capital controls, and the current hearings into how the Shinawatra family sold billions of dollars worth of assets without paying any tax. By contrast, Malaysia shines.

Second, as Christopher Wong, investment manager for Asian equities at Aberdeen Asset Management pointed out at a Hwang-DBS briefing in Kuala Lumpur on January 9, Kazanah has been cracking the whip at GLCs. The restructuring has been healthy, he says.

But there are also considerable headwinds, that are likely to prove to be resistance to the market's gains.

First, Kuala Lumpur feels depressing. When was the last time you were there? Did it feel like the place had a buzz, like Jakarta or Singapore? No. Malaysian friends have confirmed this feeling. Somehow, the place doesn't feel like it's going anywhere. And that's a worry for all business people, who depend on domestic demand for their sales.

Second, the sophistication of Malaysian retail investors leaves a lot to be desired, as Tan Teng Boo from iCapital.biz points out. In his editorial in The Star he says few emulate Warren Buffet's style of investing, despite its common sense and simplicity.

He says:

"Can we apply the Buffett-Graham-Munger approach to Bursa Malaysia? Yes, except that one has to be very patient, disciplined and do the necessary homework.

"For whatever reasons, many claim to be a follower or non-follower of Buffett without really knowing his philosophy and methodology.

"Many investors have blamed the Bursa Malaysia for losses or poor returns.

"Many have said that the Buffett-Graham-Munger investing style cannot be successfully applied to Bursa.

"Many investors do not realise that the real culprit of their losses or poor performance is themselves."

These are considerable headwinds, but in my view there is no reason why the current gains can't be sustained if the Malaysian economy perks up a little and Malaysians become more savvy investors.


Widya Abdul & Mark Laudi