Valuecap to boost market efficiency

  • Business
  • Saturday, 18 Jan 2003


TAKE a step back and one is bound to get a sense of deja vu. 

Asset management company Valuecap Sdn Bhd was launched a week ago. Before one could say V-a-l-u-e-c-a-p, investors, and foreign funds came swooping in to the market to buy undervalued stocks. As the rush continued over the week, major corporate announcements were announced, turning a once sagging market into a bustle. 

An essential variable in an efficient market is larger number of strong players with deep pockets...,Mohamed explains.

Flashback. Similarly, back in July 2001 (those were really hard times), the government had stepped in to rid the market of its biggest drag (a move most lauded) and took United Engineers (M) Bhd private. The languishing market got a further jolt back to life as a slew of major corporate deals continued to add a buoyant feel to the market. 

The timing this time around too may seem impeccable. Most market pundits say there is a bigger upside potential than downside in the local bourse this year. Do the math and there is also an abundance of stocks that are going for a bargain. Having left dreary 2002 happily behind, market participants were hungry for some form of catalyst. 

Enter Valuecap with its coffers of RM10 billion and its ability to lift both the market and the sentiments that drive it. According to some brokers, Valuecap had only bought up some RM40 million -RM50 million shares on the first day of its launch. This was followed by some significant buying by foreign funds and other investors who did not relish the idea of being left behind in the “rally”. 

True, Valuecap's total funds as a percentage of market capitalisation is not huge. CIMB Research Sdn Bhd early in the week said it merely represents 3.4 per cent of the Kuala Lumpur Composite Index (CI) market capitalisation and 31 trading days' volume (based on a three-month average).  

Even so, the local research house cautions that the fund should not undertake aggressive buying with the looming threat of a war in the Middle East. However, given its make up as a long-term investor, Valuecap “should be profitable at current entry levels”. 

In any case, Valuecap was not set up to prop up the market, asserts Tan Sri Nor Mohamed Yakcop, Economic Adviser to Prime Minister Datuk Seri Dr Mahathir Mohamad. 

But that too has grown to become somewhat acceptable in recent tough times given that the governments of many large nations namely the US and Japan have moved in to prop up their markets to cushion the adverse impact of panic selling at one time or the other. Believers of laissez fare, however, may still beg to differ. 

The setting up of Valuecap, says Nor Mohamed, is meant to boost the efficiency and robustness of the market.  

How exactly?  

“An efficient market needs liquidity. An essential variable in an efficient market is larger number of strong players with deep pockets and who can hold long term ... professionals who know how to invest,” he explains. 

And even as Valuecap is least likely to splurge all its money over the short term, it has pulled investors back into the market, those before this gripped by inertia in the belief that it was too early to buy and perhaps too late to sell. For now, the market likes the story as reflected by the surge in share prices over the week.  

The implications of the setting up of such a fund owned by Khazanah Nasional Bhd, Kumpulan Wang Amanah Pencen and Permodalan Nasional Bhd, however, should not be missed.  

CIMB Research Sdn Bhd wraps that bit up – “Valuecap signals that the government will do everything in its power to ensure that the economic growth in 2003 will come in within expectations.” 

Others say Valuecap was made with one eye on the elections and cushion the impact of panic selling in the event a war breaks out or terrorist attacks materialise.  

Still, all agree it is a positive move. “It will likely put some life back into a lacklustre equities market. It is also likely to put a cap on any significant downside to the KLCI and may even bring about some measure of success in re-rating the market,” says CIMB Research.  

A crucial question to ask however is whether selling pressure could cap the CI's potential upside spurred on by Valuecap? Over the medium term, that may not be of concern.  

“Substantial and sustained foreign selling has been seen in the CI since 1997,” says CIMB Research adding that between 1997 and September 2002, there has been a net portfolio outflow of RM53.4 billion, most of which, CIMB Research assumes, applies to the equities market.  

Assuming that whole amount applies to the stock market, it is equivalent to 18 per cent of the CI's current market capitalisation. 

On the other hand, local funds have a 75 per cent equity exposure to the market at end 2002 – nowhere near its high average of 90 per cent, said the research house. 

In short, this means that there is not likely to be much more selling from the foreigners while domestic funds definitely have more room to invest in equities. 

Over the short term however, things seem a little sticker with the impending war. 

All said and done, if Valuecap is part of the stimulus measures Prime Minister Datuk Seri Dr Mahathir Mohamad had earlier said the government is planning on, then the market may have more to look forward to. 

OCBC Research has this to say: “The commencement of Valuecap's operations in an otherwise quiet market signifies the government's clear intention to inject fresh stimulus into the stock market and the economy.  

If so, this could be the beginning of a series of actions that could boost market sentiment in the near term. As such, the CI could show further strength.”  

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