THERE are more than 300 companies listed on the Kuala Lumpur Stock Exchange (KLSE) and many of these are set to benefit as the country strives towards its goal of fully developed status by the year 2020. But while Malaysia's long-term economic prospects appear rosy, there have been some more immediate concerns that have affected overall stock market sentiment. During the first half of last year, for example, stock trading was relatively subdued because of rising interest rates. Most stock prices were kept within a tight range. Some of the best performers during that difficult period were the so-called ''defensive'' stocks, such as utilities, food manufacturers, gambling stocks and tobacco companies. Defensive stocks tend to outperform the overall market during periods of tight credit because they provide goods and services that consumers consider essential to everyday life. Following a fairly dull nine months, the KLSE finally sprang to life last October. A blue chip-led rally took the stock market's leading indicator, the Composite Index, from 580 points to an all-time high of 660 by November on record volumes. The catalyst that kicked off the rally was a small reduction in prime lending rates which had been kept high because of rising inflation. Trading was also boosted by the finance minister's budget speech in late October, in which public spending was slashed by eight per cent and import tariffs on about 600 selected items were reduced. These moves were interpreted by investors as a shift away from a tight monetary policy to tighter fiscal measures in the battle against inflation. According to Mr Gavin Graham, investment director at Connaught Investments, the stock market run last autumn was ''fundamentally based but became very frothy and burnt some fingers''. Since that rally, share prices have consolidated, providing what some brokers see as a good buying opportunity for longer-term investors. Analysts predict that corporate earnings growth this year will reach 14 to 15 per cent. Currently, price earnings ratios are in the region of 17 to 18 times - relatively low compared with previous years. While smaller overseas investors can gain exposure to the KLSE through Malaysian equity funds, foreigners may also buy individual stocks directly through a broker, if they wish. Under KLSE regulations, foreigners may take up to a 30 per cent stake in any Malaysian-listed company. Once this level of foreign ownership has been reached, the company then has two separate listings. The shares that can be traded by foreigners are designated by a ''F'' on the company's stock code. So far, only a few major companies, such as Public Bank, have reached their maximum level of foreign equity ownership. Others, such as telephone company Telekom Malaysia and electricity supplier Tenaga Nasional, are considered large enough to absorb foreign interest without having to have a separate listing. While foreign investment is generally encouraged by the government, initial public offerings are usually reserved for Malaysian nationals only. There are strict regulations concerning subscriptions for new company listings that, in effect, bar applications from foreigners. Even among Malaysian nationals, part of the new equity scrip is reserved for Bumiputras, or ethnic Malays, in an effort to help increase their share of the country's corporate pie.