Malaysia's Stocks Slump to One-Year Low on Political Tensions

By Chan Tien Hin

July 4 (Bloomberg) -- Malaysia's key stock index slumped, set for its lowest level in more than a year, on concern rising political tension will hurt investments and curb economic growth.

Banks dropped after UBS AG cut its earnings estimates in financials services companies, citing slower growth, higher inflation and rising interest rates. Bumiputra-Commerce Holdings Bhd. slid to its lowest since November 2006. Bursa Malaysia Bhd., the stock exchange manager, fell the most in almost four months.

``You have a difficult external environment and you have politics: not a very nice combination,'' said David Ng, who helps manage about $1 billion as a portfolio manager at Hwang-DBS Asset Management Sdn. in Kuala Lumpur. ``Foreigners have been the main sellers and locals have started to join in.''

The Kuala Lumpur Composite Index fell for a sixth day, losing 29.17, or 2.5 percent, to 1,124.53 at the 12:30 p.m. local time break, set for its lowest close since March 5, 2007, on course to become the worst performing benchmark index in Asia. It's the longest losing streak since March 2007.

The decline came after trading on the stock exchange's equities market was suspended yesterday due to a systems failure.

The measure has fallen 5.5 percent so far this week, headed for its biggest weekly decline since March 14. The index's July index futures contract dropped 0.5 percent to 1,111.00.

About 10,000 people rallied in a Kuala Lumpur suburb on July 1 to support Malaysian opposition leader Anwar Ibrahim, who is facing a new sodomy allegation. He has denied the claims and has accused the government of a conspiracy. Yesterday, Deputy Premier Najib Razak disputed allegations that he had an affair with a woman before she was killed two years ago, calling them a ``desperate attempt'' by Anwar to divert attention from charges he faces.

`Things Look Ugly'

Malaysian police in the past week confirmed investigations of Najib and Anwar. Both have called the claims against them fabrications intended to destroy their political careers.

``It's creating a lot of anxiety among investors,'' said Lye Thim Loong, who helps manage the equivalent of $593 million as portfolio manager at Avenue Invest Bhd. in Kuala Lumpur. ``People now perceive that Malaysian risk has gone up, so when you add the risk to their valuations, then things look ugly.''

The sodomy charge follows the ruling coalition's worst-ever election result in March that raised doubt over Abdullah's leadership. On March 10, a day after the polls result, the Composite Index plunged 9.5 percent, the steepest drop in a decade. The measure is down 13 percent since the elections.

``We see no quick resolution to the increasingly fragile political backdrop in the near term,'' Teoh Su-Yin, an analyst at Deutsche Bank AG, wrote in a report today. ``The market has yet to fully price in the negative impact of higher inflation on the economy and market earnings.''

Deutsche expects the Composite Index to fall to 1,060 by the end of the year, 5.9 percent below today's level.

Banks Decline

Bumiputra-Commerce Holdings Bhd., the second-largest Malaysian bank, lost 35 sen, or 4.6 percent, to 7.20 ringgit, its sixth day of declines, set for its lowest since November 2006. Malayan Banking Bhd., the No. 1 bank, dropped 15 sen, or 2.1 percent, to 6.90 ringgit. Public Bank fell 20 sen, or 2 percent, to 10.00 ringgit.

Bursa lost 40 sen, or 5.8 percent, to 6.45 ringgit, set for its biggest decline since March 10.

Builders such as IJM Corp. and property stocks including SP Setia Bhd. tumbled after Deutsche Bank AG said accelerating inflation will curb economic growth, eroding domestic consumption.

For now, ``avoid all sectors related to consumption, that is, property, autos, construction and banks,'' Deutsche's Teoh said in her report titled ``Summer of Discontent.''

IJM fell 34 sen, or 6.5 percent, to 4.86 ringgit, set for its worst decline since April 30. WCT Bhd. tumbled 20 sen, or 7.4 percent, to 2.50 ringgit, the second-worst performer on the benchmark Composite Index. MMC Corp. lost 14 sen, or 5.4 percent, to 2.46 ringgit. SP Setia sank 7 sen, or 2.5 percent, to 2.76 ringgit.

To contact the reporter on this story: Chan Tien Hin in Kuala Lumpur thchan@bloomberg.net;