BUY OR SELL-Malaysia stocks; value again on reform? (ext: Reuter)

Sharifatul Hanizah Said Ali, managing director of RHB Investment Management, said her firm has turned more positive on Malaysian stocks compared to three months ago.

"There should be a higher degree of confidence, definitely. There are much more definitive efforts to making sure the implementation (of government policies)," said Hanizah, who oversees $2.2 billion in assets at Malaysia's fourth-ranked bank.

"For most of our domestic funds, we're still quite confident in terms of the equity outlook for at least six months."

Foreign ownership on the Malaysian stock market has sunk to its lowest in more than three years, hovering just above 20 percent against 27 percent in January 2008, bourse data showed.

"Foreign investors have disproportionately sold down Malaysia ... a lot more than in any other country in the region," said Terence Wong, head of research at top Malaysian investment bank CIMB.

"Even during the Asian financial crisis, they never sold down consecutively for such a long period," said Wong, who recently upgraded his call on Malaysia's market to overweight from neutral.

Wong said he expects the market to perform strongly in the second half as the government's pump-priming takes effect. Eventually, he says, foreign investors will return.

"I see one of the key triggers to foreigners coming back is the succession effect, a new political leadership. To me, that's going to be a big catalyst," said Wong.

Trade-dependent Malaysia is widely expected to slip into a recession this year as the global economic crisis hits its customers from the United States to China.

Gross domestic product may shrink 1 percent, the government said, but most private economists are more pessimistic. Nomura Research is predicting a 4 percent contraction for 2009.

According to investment bank Credit Suisse, Malaysia's main stock index .KLSE is trading on a prospective price earnings ratio of 13.7 times versus 12.5 percent in Singapore.

The index has fallen about 40 percent from its record high of 1,524.7 points struck in January 2008. Singapore's main index .FTSTI has slid around 45 percent in the same period.

Given the still grim economic outlook, investors may not be ready for Malaysia yet, said Jalil Rasheed, head of equities at Aberdeen Asset Management's Malaysia unit.

"If you're based in London or in the U.S., I don't think you'd be looking at any of the smaller countries like Malaysia for the time being," said Jalil, who helps manage $2 billion) at the firm.

The implementation of the stimulus package would be key, he said.

"I don't think people would come and look at Malaysia just because we have a new cabinet. They will need to see some sort of clear execution before they will probably say: oh, maybe we should look at it again," said the fund manager.