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Monday, March 15, 2010

Market challenges

Thestar: Saturday March 13, 2010

Bursa: Ideal investment equation is an even mix of foreign investment, domestic institutions and retail participation.
ON the global investment stage, the developed economies have become so yesterday. To most people, the hot spots for sustained high returns are the emerging markets, particularly Asia. And this notion still prevails today. In fact, the recovery of the Asian economies, which is leading the world out of a deep slump, has only served to strengthen such a view.
Hence, the region is becoming a magnet for global capital. “As it is, the Asian recovery story is already driving the region’s equity markets and it will continue to do so for the longer term,” says Bank Islam chief economist Azrul Azwar Ahmad Tajuddin.
Clockwise from top left: AmBank group MD Cheah Tek Kuang, Bursa Malaysia Bhd CEO Datuk Yusli Mohamed Yusoff, FTSE Group chief executive Mark Makepeace and CLSA Securities Malaysia Sdn Bhd head of research Clare Chin
But on the flipside, the intra-regional competition for capital will just keep on intensifying, and surely, there will be winners and losers in terms of gaining a share of the pie.
As it stands, anecdotal evidence seems to suggest that Malaysia is not on the winning side, as the local bourse continues to lose ground to other regional markets deemed to be more vibrant and freer, especially with regards to the movement of capital.
The heartening news, however, is that Bursa Malaysia Bhd is not sitting still. Chief executive officer Datuk Yusli Mohamed Yusoff has pledged to step up efforts to promote the stock exchange so as to bring in a fair share of the global capital.
At a recent roundtable discussion organised by Bursa Malaysia in collaboration with StarBizWeek, Yusli likens Malaysia to a little boy surrounded by so many other taller guys, saying the country needs to “shout louder and jump higher just to get investors’ attention”.
Losing lustre
“That’s just the right thing to do,” Kenanga Investment Research economist Wan Suhaimi Saidi says. “Efforts to promote our capital market are crucial because the competition for capital is increasingly stronger with the rise of other emerging economies, such as the BRICs,” he adds.
(The BRICs refers to Brazil, Russia, India and China.)
Contrary to how it was for Malaysia before the 1997/98 Asian financial crisis, when it was a sweet spot for foreign capital inflow, Malaysia is definitely no longer the favourite destination for investors to park their money, contends a broker from an international firm.
However, that is not to say our local bourse has utterly vanished from the foreign investors’ universe. They account for about 25% of the total value traded on Bursa Malaysia. Domestic institutions are the most active participants, contributing more than 50%, while local retail participation continues to lag.
The ideal equation, according to Bursa Malaysia, is an even mix of the three groups of participants. And achieving that is the exchange’s goal.
So, to Yusli, marketing the market is not just about attracting foreign inflows, but also about boosting interest among individual investors at home.
There is excess liquidity (as in funds held by households and institutions) submerging the financial system, and that offers the local bourse the potential to tap into these monies and bring back some vibrancy – the element Yusli says is missing in the market today.
However, Bursa Malaysia faces challenges in attempting to restore vibrancy. Analysts point out four major issues that need to be addressed – the country’s growth story, investors’ perception of the market, liquidity and choice of companies.
A defensive growth story
As economists point out, it is not that Malaysia lacks a growth story; it is that the story needs to be stronger.
“Many investors prefer to park their investments in destinations where there are ‘sexy’ growth stories, as in high growth rates, even though these tend to be associated with the higher risk of ‘overheating’,” says Wan Suhaimi of Kenanga.
Datuk Yusli Mohamed Yusoff has pledged to step up efforts to promote Bursa Malaysia.
Malaysia’s projected 2010 growth rate of 5% may not make a ‘sexy’ story, but it is a healthy and sustainable pace, and with that, it provides a less risky environment for investors.
The key attraction of the Malaysian market is it is defensive, somewhat a “safe haven”, as CIMB head of equity research Terence Wong argues, because of the strong participation of local fund managers cushioning any negative impact. In other words, in a downturn, the Malaysian market tends to fall less than others.
Being a low-beta market (less risky, but lower returns), the attractiveness of the Malaysian bourse is a relative issue, Wong argues. “It depends on the condition of the other markets in the world,” he explains.
A senior “buy” analyst from foreign fund management company Manulife concurs. “When regional markets are buoyant, Malaysia would not be the first choice of foreign investors. But when regional markets are down, investors would turn to Malaysia to park their monies,” he opines.
Limited choice, less movement
Based on fundamentals, Malaysia has some compelling factors to offer in building up interest in its capital market. As it is, many listed companies on the local bourse, particularly those with regional presence, are already growing at rates faster than that of the country’s economy.
The downside, however, is the choices of such big companies in the Malaysian capital market are rather limited, compared with other markets in the region such as Singapore and Hong Kong, the foreign fund manager points out.
“That’s one of the main reasons the Malaysian market doesn’t appear to provide much excitement to us,” he explains.
Terence Wong ... ‘The Malaysian market is defensive and somewhat a safe haven.
In addition, most of the large Malaysian companies are already trading at relatively expensive valuations. For instance, the blue chip plantation counters are trading at a premium of more than 5%.
“Other markets at the moment seem to be offering more attractive entry levels because of their cheaper valuations,” a foreign broker says.
Another complaint among foreign investors is the small free float of many of the listed companies in Malaysia, especially big and well-managed ones, because the bulk of their shares are in the hands of major shareholders. Hence, such stocks are not easily available.
The tight shareholding control of these companies is one of the main reasons for the lack of liquidity – as in the level of ease to buy and sell stocks without drastically affecting their prices – in the Malaysian stock market.
For instance, government-linked companies (GLCs) at present account for about one third of Bursa Malaysia’s total market capitalisation. In many cases, the majority of these GLCs’ equity is owned by the Government and institutions controlled by the Government.
If the major shareholders of these tightly-held companies pare down their stakes and thus allow more shares of the companies to be traded, it will help improve liquidity in the local market. Without the element of liquidity, it is tough to attract investor interest, says a broker.
As FTSE Group chief executive Mark Makepeace puts it, it is about creating liquidity to build the momentum to attract further liquidity.
Meanwhile, a dealer argues that a fair amount of speculation should be allowed to move the market and enhance liquidity. An overly regulated market does not give much room for sustained activity that can push the market, he says.
In an effort to stamp out market speculation by syndicates, Bursa Malaysia and the Securities Commission have been stringent in monitoring of stock trading activities and have taken action when there is suspicious activity.
“In a way, the authorities have to be credited for such effort because it could provide some form of protection to investors, particularly those who are less sophisticated,” says Wong.
At the same time, in a reflection of how difficult it is for regulators to balance their twin roles of driving market development and looking out for the investors, there are also frequent complaints that the authorities have not done enough to weed out market manipulation.
New model a fresh catalyst
The consensus view among market analysts is that investors are now turning their focus on the new economic model (NEM) to whet their interest in the Malaysian capital market.
On Thursday, Prime Minister Datuk Seri Najib Tun Razak said the “first stage” of the NEM would be launched by the end of the month, and that more details about the NEM would be unveiled during the announcement of the 10th Malaysia Plan in June.
Many are hoping that the NEM will take the country to the next level, and create a more dynamic Malaysian economy that can compete with other fast-emerging economies in the region.
“There is high expectation that the NEM would have pro-business policies to address the declining private investments in the country,” the Manulife analyst says.
Another issue that needs to be tackled is the slow creation of a new generation of big and successful companies over the last 10 years. Only a handful have emerged, most notably the AirAsia group.
A local broker urges the Government to step up efforts to encourage the creation of such companies that can be floated on the local bourse, as most of the existing ones in the country are already listed. “This is important to provide diversity and inject some vibrancy back into the market,” he explains.
Perception is everything?
With Malaysia making not-so-favourable headlines of late, pertaining to political and social developments, foreign investors’ sentiment towards the country’s stock market in general remains lukewarm.
“Thanks to the media for that,” Wan Suhaimi quips.
Those negative views that foreign investors have towards Malaysia are probably unfair – and untrue to some extent – and do not reflect the earnings and potential growth of local companies.
But in the capital market, perception is everything. Or is it?
“Well, that depends. Serious and intelligent investors go deeper than just the perception,” Kenanga’s Wan Suhaimi opines.
“Smart money will go where there is a better option and more benefits. It goes beyond politics or individuals.”
While some of the measures implemented by the Government last year to reform and liberalise the economy had been positive for the capital market, improving investor sentiment remains a major hurdle.
The reality is, many investors have not been keeping track of what’s happening in Malaysia since the country fell off their radar screen more than 10 years ago, when the Government instituted the restrictive measures of capital controls and exchange rate pegging in the wake of the Asian financial crisis.
Hence, they are not aware of the initiatives that the Government has taken over the years to revamp and open up the economy. For instance, capital market experts point out that many foreign investors still think that capital controls and exchange rate pegging are in force even though those measures had been relaxed several years ago.
“Clearly, some investor education is needed here, but what’s even more crucial is consistency of the Government in terms of policy implementation,” a foreign broker says.
Earlier, the Government had announced plans to implement measures within this year to liberalise and reform its economy. These include the restructuring of the fuel subsidy scheme and a review of electricity tariffs. However, the plans to implement some of those measures have been reversed.
Such developments can only moderate investors’ optimism and enthusiasm towards the Malaysian market.
“Coming from the foreign fund managers’ perspective, I can tell you that we are feeling a bit uncomfortable because we can’t gauge which direction your country’s policy is going to turn next,” a foreign fund manager explains.
Truly, the task of bringing back vibrancy and drawing investor interest in the local stock market cannot be achieved solely via Bursa Malaysia’s marketing efforts; it has to involve all the stakeholders in the economy.
And working towards that is essential to building an efficient institution that can mobilise resources and raise funds for the financing of projects and investments. That will ultimately promote further economic growth.
A vibrant capital market, after all, is an essential feature of a high-income economy.

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