THIS week, we look at the stock market, which is known to be a leading indicator and reflection of the country’s economy.
The market also reflects the country’s economic policies, incentives, and risk premiums, and the depth and breath of the companies available for investing.
Let’s take a look at where Malaysia is compared to its regional partners. In the 1990s, Malaysia was an investor’s darling, one of the key markets to invest in. The reason was due to government policies that encouraged businesses and entrepreneurship to flourish. While we had some entrepreneurs who bordered on being complete con men, the market thrived with the rest of the corporate leaders who were colourful figures with a lot of passion and ideas.
When the 1997/1998 recession hit, Malaysia was again known for being unconventional (and we initially paid for that decision), but at the end of that cycle, we recovered.
We then had a change in leadership from 2003/2004. This created a new wave which focused on liberalising the media with the move towards the Internet age. However, we were faced with a market meltdown due to the dot-com bust and then we were hit with the global financial crisis in 2008. Again, the Asean stock markets were not spared.
Let us take a look now at how our market has grown today compared to our neighbours in the region. Now why do we need to look at Malaysia relative to its regional neighbours? It is for you to understand that when regional investors look at what is worth putting their funds into, they look on a comparative basis. So how have we done?
We tracked how the indices have grown (in US dollar) since end-December 2009 to end-December 2017 for Malaysia, Thailand, the Philippines, Indonesia, Singapore and Vietnam. We can clearly see the following:
> Malaysia FBM KLCI rose 19.54%
> Singapore STI rose 24.66%
> Vietnam VNI rose 65.30%
> Indonesia JCI rose 75.19%
> Thailand SET rose 144.67%
> Philippines PComp rose 159%
In the period that we have reviewed, the FBM KLCI has risen the least compared to our neighbours.
Whether you look at it from a US dollar basis or even in local currency, the FBM KLCI has not done well.
Let us look at the market capitalisation as at end-December 2017:
FBM KLCI - US$269.4bil
VNIndex - US$115.1bil
PComp - US$206.8bil
STI - US$440bil
JCI - US$520.6bil
SET - US$538.1bil
Yet, if you go back to the late 80s and the 90s, right through the Asian Financial Crisis, the Malaysian market was of greater interest then. We had a variety of interesting companies that were worth investing in, and the size of the Malaysian market was relatively bigger than the surrounding countries.
Yet, if you look at the size of the Malaysian market today, we are larger than the Philippines and the Vietnam Index.
What is really upsetting is that Vietnam was not even a force to be reckoned with and at the rate at which they are going, they will soon overtake us in terms of market capitalisation. The Philippines, on the hand, is not even on full day trading and they are already moving into the US$200bil market capitalisation.
One of the worst things that has happened in Malaysia over the last 10 years is that the entrepreneurial spirit has been crushed. Burly institutions have entered areas which used to be driven by SMEs or by individuals who wanted to start and grow businesses. The system of patronage has completely destroyed the growth of the SMEs. With fewer listings of interesting companies, the Malaysian market quickly fell behind its neighbours.
The other issue that has led to the lacklustre market is the current tax structure. In the beginning, there was all this hype that the corporate tax rate would be reduced, and that the individual tax rate would be more constructive in building up the middle class (there should be a higher threshold for individuals to qualify in the highest tax bracket).
How can we compete in a region where tax rates are coming off and there are so many more incentives for businesses to flourish and grow? We have not seen this environment in Malaysia; instead, we have been handcuffed with huge amounts of regulations with no incentives. This is a very prohibitive combination for any business.
We have also been subject to flip-flopping policies which have badly hurt businesses. For example, the government implemented withholding tax for individuals who did not conduct businesses locally. This move hit Malaysian companies that had dealings in Asean.
All of a sudden we lost consultants and advisors as they refused to pay the 10% withholding tax – it was not just the amount they objected to, but also the sheer hassle of doing the actual submissions.
This decision was reversed a few months later, but it was a very costly decision by the authorities and the business community faced a definite setback. There was a new trust deficit in how far the tax net would be thrown.
The solution to a thriving market is to have consistent and transparent policies, the enforcement of the “rule of law”, and incentives that are mong dated. With a new era upon us, we need to crack the whip and allow those FDIs and SMEs to flourish.
Datuk Shireen Muhiudeen is MD of Corston-Smith Asset Management in Malaysia, a fund management company that makes investment decisions based on corporate governance.
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