THE STOCK MARKET
by Dr. Mahathir bin Mohamad on Friday, November 19, 2010 at 9:57am
1. Lately we have been seeing rather rapid increases in the Kuala Lumpur Composite Index. Those who play the stock market must be feeling very happy. Much money must be made by investors from capital gains.
2. Some people believe that the rise of the KLCI is an indicator of the healthy state of the Malaysian economy. This may be true but let me throw some cold water in the belief that the index indicates that the economy is doing very well.
3. It is doing fairly well, no doubt, but that is not enough to push the KLCI to record highs. What is happening is that a lot of foreign money is coming in to buy Malaysian stocks.
4.In itself it is not bad. It is also a kind of foreign direct investment (FDI). But this kind of FDI is not about setting up industries to produce goods for export. The latter will not be easily liquidated to take the invested capital out. The plants which are set up cannot be easily sold. The Investors will have to manage them through good and bad times to get a return on their investments.
5. But FDI in stocks and shares can be sold any time and the proceeds taken out.
6. Just as increases in investments push up share prices and the KLCI, rapid or massive divestments will push down the share prices and index.
7. We read in the papers that the Federal Reserve Bank of the United States is pumping US600 billion Dollars into the US economy. A part of this money will no doubt be used to invest in stock and shares of the developing economies. The result of this FDI-financed purchases will be a rise in the share prices and the KLCI.
8. In 1997-1998 the foreign investors pulled out their investments and the KLCI dropped from 1,300 to 262. Naturally a lot of local investors lost money. They could not meet margin calls nor raise money to augment collaterals for their bank loans.
9. The banks found themselves burdened with large numbers of non-performing loans and had to face the threat of bankruptcy.
10. Should the banks collapse the economy of the country will go into a tailspin. It did in 1997-1998. It will happen again should the foreign investors dump their Malaysian shares to take profits from capital gains.
11. Foreign funds, especially from the US coming in to invest in Malaysia's stock market at this time must be considered as hot money. I would not be suprised when the KLCI peaks the foreign investors will dump their shares and collect capital gains. The share prices will fall rapidly and Malaysians who had chased the shares on their way up will be asked to meet margin calls. If they fail they will lose a lot of money.
12. I hope I am wrong. But sometimes my predictions about money and markets have proven to be right. In any case I only own 200 Malayan Tobacco shares bought before I became Education Minister. I have nothing to gain or to lose, but the country and the stock market investors will lose.
