PERFORMANCE on the Malaysian stock exchange last year was anything but recalcitrant. The Kuala Lumpur Composite Index rose 98 per cent and in the past month share prices have moved almost vertically, shunning any negative news - like a looming election or a boost in the reserves banks must hold - with gay abandon. But yesterday came a tumble as markets across Asia proceeded to shed the almost instant gains of the final quarter. The Kuala Lumpur index fell 65.77 points to close at 1,248.69, its largest-ever single-day drop. Is it time to take the profits and run, or is there still room at the top? Depending on the way they make their calculations, brokers are split on prospects for Malaysian stocks. While some say there is little to justify a buy, others believe the market, which has a capitalisation of M$619.64 billion (about HK$1.81 trillion) at the end of last year, has further to go and are pencilling in more strong gains over the next six months. Fund managers are mostly sceptical, seeing an unjustifiably expensive set of price tags and an awful lot of fickle hot money. ''It is one of the few markets one can categorically lay a finger on and say, 'Value is hard to find here','' said Paul Parsons, senior fund manager with Invesco Asia. Fidelity Investments said: ''Fundamentally, the market is expensive. Some of the Southeast Asian stock markets, particularly Thailand, Singapore and Malaysia, are beginning to look highly valued. ''There is still room for growth in some of the markets, but investors should be cautious.'' For the bulls, Baring Securities analyst Eugene Marais reckons the market has at least six to nine more months of very healthy performance in store, and recommends investors remain overweight in the first quarter of this year. He said: ''Ever since the budget last November, the market has been in a buoyant mood in anticipation of a better policy mix. This is now becoming evident with interest rates easing gradually and the ringgit having firmed. ''Capital inflows have boosted liquidity considerably, partly accounting for the vibrant performance of equities, but the change in monetary policy will act to slow it. ''Following the end-of-June correction, the earnings multiples are a little more palatable, given the nine per cent real earnings growth that we expect in 1993 [and 11 per cent in 1994]. ''Nevertheless, investors would be well advised to trade out of the speculative counters on any rebound ahead of the UMNO (United Malays National Organisation) election, and to accumulate selective blue chips during any weakness.'' The shift in monetary policy which Mr Marais sees on the cards is a greater flexibility for the Bank Negara, the central bank. While keeping inflation control as the cornerstone of monetary policy, he said the export-driven nature of the growth would provide the bank with the flexibility to ease interest rates, at the same time allowing the currency to appreciate. Economic fundamentals stack up like the best of the countries in the region: healthy gross domestic product (GDP) growth forecast at about eight per cent for this year, in line with growth in both 1992 and 1993, modest inflation pitched somewhere below four per cent and interest rates gauged to hit eight per cent by year-end. The country's sovereign long-term foreign currency debt is rated a safer bet than that of Hong Kong's Mass Transit Railway Corp, having been upgraded to A2 by credit-rating agency Moody's on the basis that steady economic process will continue over the medium term. In its latest report, Moody's said: ''Foreign direct investment has usually been far in excess of the recorded current account deficits. Gross national savings have remained quite high by world standards. ''The structural changes presently taking place in Malaysia will lead towards a higher level of economic development in the future.'' Moody's was also prompted to upgrade the previous A3 rating - which would have put Malaysia on a par with China - by tumbling debt-GDP and debt-exports ratios. Politically, the picture looks more stable than it has been for some time. (That's barring the recent playground scrap provoked by Australian Prime Minister Paul Keating's description of his Malaysian counterpart as recalcitrant after Dr Mahathir Mohamadrefused to attend the unprecedented Asia-Pacific leaders' meeting in November.) The power struggle for succession within UMNO, a major partner of the ruling coalition, was extinguished by the elevation of Anwar Ibrahim to deputy prime minister. However, most analysts expect an election to be called sooner rather than later - possibly in the first quarter - again creating an atmosphere of uncertainty. On the brighter side, observers reckon the impending election means the Government will do its utmost to keep the market, as a barometer of its own performance, buoyant. While pointing out that rifts and tensions had not been completely obliterated from the political stage, the Political & Economic Risk Consultancy said opposition parties would have to dig hard for issues to convert into votes. More pragmatically, Moody's said rising income levels across the board had dampened the potential for ethnic strife while the National Development Policy adopted in June 1991 was producing a host of political and economic windfalls. On the corporate side, earnings forecasts are perhaps modest by the standards set by Hong Kong and other markets in the region. Analysts are looking for percentage growth around the low to mid-teens. Mr Parsons said: ''In Hong Kong, there is the argument of playing on fundamentals - we have not gone stupid and poured in money and pushed stocks up to outlandish price-earnings (PE), even if it has looked rather high relative to historic norms. ''Whereas in Malaysia things have got hugely out of hand, up to 35 times 1994 earnings in some cases, depending on how you do your calculations. About 30 times is the consensus, and that's high.'' Mr Marais said that in the current bull run the bulls had tended to be predominantly retail investors, and in keeping with markets across the region, the market had been rerated. But rough figures by the Kuala Lumpur stock exchange conceal another trend. Unlike its neighbours, the index has been prey to far more selective buying. Rather than acting as the powerhouse for index runs - a role taken on at one point by virtually all telephone companies in Asia, and certainly one to which Hong Kong Telecommunications and its Singaporean and Thai counterparts are no strangers - Telekom Malaysia has actually held back the index. Stripping out Telekom and monopoly electricity supplier Tenaga International, Barings said the market had moved from a prospective PE of 15.4 times to 20.3 times, which Mr Marais said now fairly reflected longer-term earnings growth potential. Further fundamental upside in the short term was limited, he said. Siding with the Malaysian bears, Crosby Securities director Patrick Allen put the marketing on a PE multiple of 29 times 1994 earnings. He said: ''The PE of 29 times is high, yet the risk is higher than most markets. The strong economic growth is not translating into particularly high earnings growth - 16 per cent for 1994 and again for 1995. ''I think the PE rating has got excessive. The amount of contracts given out without proven valuations is, I think, dangerous.'' Echoing this, Mr Parsons said the recent rises had been fuelled by speculation and noted that only in the latter stages of the rally were blue chips swept up. Before this, activity centred on smaller issues. This does not mean that good buys remain, and fund managers are continuing to shore up or hold on to quality stocks such as Sime Darby, a widely diversified group that spans plantations, commodity trading, manufacturing, property development, tractor assembly and distribution and insurance services. It is engaged in activities throughout the region through subsidiaries in Hong Kong (car distributor Sime Darby Hong Kong), Singapore, the Philippines and Australasia. For Mr Parsons, the only decent buy remaining is Proton, the national car company. Mr Marais added plantation stocks, banks and manufacturing plays. ''The banking sector offers steady, quality earnings growth. ''With loan growth expected to recover in the second half, and interest margins having widened, reported profits will show above-average increases this year.''