"No warning can save people determined to grow suddently rich" - Lord Overstone

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Malaysia: The Growing Tiger

We had recently returned from our third trip to the lively city of Kuala Lumpur in the nation of Malaysia. Its our third trip because we genuinely enjoy the liveliness of the capital. With such a rich and diverse set of cultures, this country is one of the most genuinely open countries to people of all race and religions. Citizens of many countries that usually require visas to travel to western worlds are openly welcome to this country. In the heart of the capital, we had met and mingled with Malays, Hindus, Chinese, Arabs and Japanese. Its "One Malaysia" policy of integrating ethnicities fairly into its society is just one example of the elevated social mood of Malaysia. The big brother of Singapore - which Singaporeans would liken Malaysia as an uncouth andlazy big brother - looks to be getting its act together.

We see huge opportunity in this country in most forms of investment, especially as it tries to play catch up to the rest of the developed world. This is a nation who can be entirely self reliant and will learn that it has the ability to sustain the growth on a very long term basis. And indeed we are witnessing the government officials attempting to get their country in order. Putrajaya is one example of planning for the future. Putrajaya is a planned city forming the hub of Malaysia's federal administration centres. A project launched by the former Prime Minister Mahathir Mohammad, he understood that Kuala Lumpur is becoming less and less accessible to people as over crowding grows. A new city, half way between Kuala Lumpur and the country's international airport, was in our opinion a good place to locate the new city. Putrajaya is clean, spacious, large and well designed. It houses the most important of government agencies and may well soon enough become the country's newest business capital. As older and outdated cities become outgrown all over the world, newer and more efficient planned cities will soon spring to life all over the planet, with Putrajaya setting an example.

The policies of the government seem to be garnering the attention of the developed world. Many international companies have relocated their manufacturing departments and factories here and Malaysia is experience record growth in this sector. During 2010, manufacturing sales growth averaged 15%. In was in sync with an average of 7.5% in industrial production during the same year. Its people have taken to this boom in available work with an official unemployment rate registered at 3.5%. And, while we are always a little skeptical at the official numbers, the registered inflation figures were a meager 2.2% YOY in December 2010. That is doubly encouraging given the overnight cash rates are set at 2.25% making it one of the few emerging economies with a real rate of interest not eroded by inflation. Inflation, it seems, does not exist in Malaysia, although we are highly skeptical of the official numbers.

Despite whether official figures may or may not be accurate, what we do see and feel are the tangible projects. Malaysia Airlines and Tiger Airways (part owned by Malaysia Airlines and Singapore Air) are amongst the highest world class standards for international and budget airlines. One strategy for increasing growth as witnessed in Dubai and Singapore was to use the prestige and efficiency of their airlines to bring global citizens to their cities. Malaysia too is emphasizing the need to increase the reputation of its airlines and it is succeeding.

Other tangible projects which can be seen are the recent growth spurt in mergers and acquisitions taking place. The number of acquisitions of Malaysian companies almost tripled in 2010, as compared to 2009, to $21.3 billion, the highest in three years. The deal increase came after Prime Minister Najib Razak eased rules governing takeovers, initial public offerings and property purchases in Malaysia. With attractive graduated tax rates from 0 to 26%, though they could be more attractive, its another positive incentive for attracting the foreign skilled worker. And the foreign skilled worker may yet find their way here very soon, with the European nations - and soon America - to undergo harsh austerity measures, Malaysia should step in to fill these needs. We expect a large inflow of skilled foreign workers into Malaysia, especially as the cost of living in neighboring Singapore is starting to become grossly overpriced, making it a cheaper alternative.

Ever since America, China and the European Union underwent massive rate cuts, stimulus and quantitative easing measures, the investment world has sought the "high yield" investment. Also known to us as the risky investment. And the wave of money has arrived in Malaysia. Property prices are reaching the "bubble" territory with price rises in the double digits year on year. It had forced the Bank Negara - Malaysia's Central Bank - to introduce a maximum loan to value ratio of 70% on the 11th of Nov 2010 i.e. you now need at least a 30% deposit before you can ask for a home loan. The central bank went on to say "At the national level, residential property prices have increased steadily in tandem with economic development and the rise in income levels. This aggregate growth trend remains largely manageable and has not deviated from the long term trend in residential property prices. In the more recent period, however, specific locations, particularly in and around urban centres, have experienced faster growth, both in the number of transactions and in house prices. This is further supported by an increase in financing provided for multiple unit purchases by a single borrower, suggesting increasing investment activity that is of a speculative nature."

Indeed it is our view that property prices are over priced, and yes perhaps a correction is due, but these extreme prices are mostly being registered in the heart of Kuala Lumpur. Half an hour drive outside the city and the property price rises are not as drastic. We would be highly interested in purchasing some property in Malaysia should prices level out soon. If we are considering a decade long time frame, then current overpricing can be ridden through.

On 30 June 1981, the FTSE Malaysia Bursa KLCI Index printed 540.33. Today it trades at 1512.85. In 30 years, given the enormous growth of the developed world, Malaysia managed to "only" triple in value. Don't let the world "triple" fool you. That is a small 3.55% annualized return on your money. A standard cash savings would have produced better returns. But today the stock market is making a very impulsive break higher - and its currency is gaining at the same time. It is rare that it happens these days - stock and currency appreciation - but it is the foundations of a true bull market, unlike the untrustworthy currency down equities up formula for the US stock index.

The one thing that stands out for us about Malaysia is its abundance of natural resources that allows for long term sustainability of any growth that may comes its way. Unlike the United Arab Emirates - or even Singapore - who lack natural resources and the need to import almost everything they wish to consume, Malaysia has an abundance of water, agriculture, minerals and forestry to drive their export led model for centuries. There is enough natural gas and oil supplies to last them many decades. Should the world cave in on itself, Malaysia has the ability to survive on its own, unlike the UAE and Singapore that depend on the outside world for their survival.

To us Malaysia has the perfect mix of opportunity, foreign investment and long term sustainable ingredients to make this country the next boom town.


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