Market rally no excuse to be complacent

Thursday April 19, 2007 article of icapital

Since the lows set in June 2006, the KL Composite Index (KLCI) has risen rather impressively and the volume traded has not been that bad either.

It looks like the KLCI it will be beating Bangkok for once, although we have lost to the Singapore or Jakarta markets. But should we exploit the current market rally or should we be more circumspect?

Stock market rallies can be very ego boosting. A rally seems to tell the whole world that everything is fine with the economy and that the Government has adopted the right policies.

Generally speaking, this is true but the stock market rallies for all kinds of reasons and sometimes, it can be self-deluding.

Or worse, the rally creates complacency among the politicians and policymakers so much so that painful but necessary decisions are not made or postponed until it is too late. Then, the market crashes. The Asian crisis in 1997/98 is a classic example of how stock market rallies can camouflage structural problems until the day of reckoning.

The way to manage a country or company is, in a sense, very simple. When things are fine, do not become over-confident; instead get ready for the storm ahead. So when the storm comes, which it eventually will, one will not be so devastated that one cannot even recover or that the recovery takes a long time.

Vice-versa, when the storm does come, do not panic and rush into making all kinds of silly short-term decisions that would harm the country or company. It will eventually pass and the whole cycle repeats itself. Take advantage of the storms and use them to ensure that the eventual bright sunny days are not so blinding.

i Capital has frequently criticised the Malaysian government for the measures it took in response to the 1997/98 Asian crisis. The essence of its criticisms was that the Government’s very short-term measures greatly reduced or attempted to reduce the pain of the crisis, but in so doing, it ignored the adverse long-term implications of its actions and decisions.

In many respects, Malaysia has paid a heavy price for this and is still paying the price for ignoring long-term problems. By shielding Malaysians from the harsh and painful realities of the market economy, we now have a Malaysian workforce that is hopelessly complacent and in the process, losing out to the many fast rising regional competitors.

With the KLCI now rallying, i Capital is deeply worried that our world-class complacency would become universe-class. As it rallies, the politicians and policymakers are patting themselves on the back for a job well done.
Such self-praise and complacency can be very infectious and soon Malaysians from all walks would fall into the same mental trap.

Then, the next crisis will hit us when we are totally unprepared.

A few rounds of such crises, and Malaysia would sink into an economic quicksand.

The simple but wholesome message of this week's analysis is directed at the politicians and policymakers and Malaysians from all walks of life.

Do not be seduced by the current market rally into thinking that we are on our way to developed status. Do not postpone the major structural reforms needed. Malaysia has already lost so much time.

The unemployment rate in Hong Kong shot up when the Asian crisis struck. In contrast, the unemployment situation in Malaysia, thanks to the drug addiction-like economic policies that had been implemented back then, was never as severe as Hong Kong's or the other Asian countries'.

Except for a few debt-ridden and badly managed Malaysian companies, Malaysians generally never suffered any pain during the Asian crisis. In 2002, we were pleasantly shocked at the totally changed attitude of the Hong Kong people.
The infamously rude Hong Kong taxi drivers or the world-renowned rude waiters were offering their services at Ritz-Carlton-class quality.

The Hong Kong economy had been severely affected and its people shell-shocked at the severity of the crisis. Imagine buying Hong Kong properties and losing their pants.

At that time, we thought that the change in attitude would be short-lived.

But lo and behold, four or five years later, the same polite and courteous service is maintained, although the economy has recovered and is performing better than Malaysia's.

The pain and shock of the Asian crisis have left a deep scar among the Hong Kong people. In contrast, the Malaysian taxi drivers, a representation of the typical Malaysian, are still offering the same lousy service at inflated prices.

Thanks to our brilliantly thought out economic policies, Malaysians do not have to deal with the harsh realities, yet they want to enjoy the fruit of hard work (especially if it is somebody else's).

Malaysians have no ugly scars to remind them that when things are fine, is the time to take painful but necessary reforms.

While others have had to “eat bitter fruit”, Malaysians had only been exposed to the sweet ones. Adversities like the Asian crisis have a major role in shaping positive attitudes and mindsets.

Malaysian politicians and policymakers must allow such character forming events to play their roles.