Apollo Investment Management 

Investment grade markets, and the imperatives of the herd

Today's Asian Wall St Journal reports that the Malaysian government has approved a scheme for the release of the CLOB shares which have been "frozen" for more than seven months. Bloomberg on the other hand reports a continuing battle, with the KLSE chairman attempting to block a proposal backed by the finance minister. Assuming that the proposal is as reported, it is appalling on multiple counts.

Investors are being given three options:

(a) sell their shares at the average price traded between 15 Sept 98 and 15 March 99. On the former date, the prices of CLOB shares had plummeted to huge discounts to their Malaysian equivalents, themselves collapsing, on fears of outright confiscation. 15 March precedes the recent stockmarket rally. The AWSJ quotes an estimate that the average discount to present market price would be 30%, but it may be much more.

(b) swap their shares at "close to" market value into units of a closed-end fund, which will be tradable - presumably at a discount.

(c) hold their shares for another 3 to 5 years.

The problems are several:

1. Rights of ownership. The 170,000 investors in shares formerly traded on the CLOB system are legal and outright owners. They should be allowed to trade the shares freely. There are no grounds to prevent them from selling at prevailing market prices. There are no grounds for confiscation. There are no grounds to force sales at discounted prices.

2. The frequent shifting of goalposts. Since September, rules have been changed so often that many investors have lost all confidence. Many CLOB investors have lost all confidence that their rights will be protected, and may be too fearful of further changes to hold on for the long term.

3. The lack of clarity. It is reported that the government has approved the scheme, but that details are sketchy. Unfortunately, this is nothing new. Previous policy announcements have come in this manner, causing panic and confusion. "Clarifications" from Bank Negara have sometimes followed one another in rapid succession, and sometimes even contradicted themselves internally.

4. The suspicion of insider advantage. The approved buyer of discounted shares is a little-known businessman said to be closely associated with finance minister Daim Zainuddin. Unfortunately, this again is nothing new. The finance minister is known to take a close interest in the stock market, and has access to much information not available to other participants - for example, the daily trades of individual foreign investors, following the banning of nominee facilities.

5. The willingness of banks, apparently including RHB and Bank Bumiputra, to lend RM5bn to a RM2 company set up for the buyer. There are few signs of genuine bank reform. There are many signs of preferential treatment for cronies.

6. Unfairness. CLOB investors are mostly individuals; many are pensioners. There is a growing impression that there is one rule for the small investor, or small borrower, and another for the large and well connected investor, or borrower. The recent representations of some foreign institutional investors that they should be given preferential treatment were unedifying and short-sighted. I learnt in India that "case by case" means "suitcase by suitcase".

7. Many Malaysians fear that the rule of law is being eroded; that the quality and efficiency of the judicial system is being undermined. According to the Malaysian government, foreigners have no right to any such view, as it implies a disrespect for the Malaysian system; indeed the prime minister has denounced doubters are "racist". While unconvinced by this logic, we note that not all Malaysians share his confidence in the legal system. Foreigners have every right to be nervous.

In my view this precludes Malaysia from an "investment grade" ranking for international investors: the risks of outright confiscation, and of the unlevel playing field, are too great to encourage further investment. This is unfortunate, as Malaysia has a number of companies where competent and conscientious managers are doing an excellent job as stewards of shareholder interests, but the top-down risk under this government is remarkably high. The risks may rise further, if a liquidity-driven stockmarket rally fools the electorate on the underlying health of the economy and alleviates pressure to reform.

It is reported however that foreign institutional investors are currently once again net buyers of Malaysian equities, even if their enthusiasm for Malaysia is more muted than for other regional markets. Many fund managers, faced with an inrush of liquidity on the new story of Asian recovery, have no choice but to invest, given their benchmarks and the competitive pressures. They may have personal qualms about the risks of loss to their clients, but this is "Other People's Money" and can be wiped out without consequence as long as competitors are in the same position; if they underperform a benchmark index or the peer group for a quarter, their jobs may be on the line.

Note the gulf which has opened up between the interests of end-clients and those of the investment management industry at large. This divergence - which applies as much to the major markets as to our parochial concerns in Asia - is destabilising and dangerous. My own money is on the line in the Apollo 001 Fund, and my great good fortune is that I am not compelled to join the stampede of the herd. 

Claire Barnes, 30 April 1999

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