THE spectacular performance of the local stock market, notwithstanding the ongoing economic slowdown, is one of the hottest topics of the day.
Who would have thought that shares on Bursa Malaysia would hit new records in trading values at a time when a deadly pandemic was attacking the world.
Stocks, though, have rallied about one-fifth off the March 19 low with Bursa Malaysia scoring a record-high volume at 11.21 billion securities on Monday.
One big beneficiary to this phenomenon is the local exchange itself. Bursa Malaysia Bhd’s share price has climbed by a massive 70% over the last two months, adding some RM2.65bil in market capitalisation to close up 5 sen at RM7.80 yesterday.
More trading simply means more fees for the exchange to collect.
But it still seems unfathomable on why there is so much money flowing into the stock market when businesses are haemorrhaging due to the pandemic. True there are sectors such as rubber glove makers which are seeing spectacular results but many other companies claiming to benefit from the pandemic may not necessarily report stellar earnings.
Bursa Malaysia’s chief executive officer Datuk Muhamad Umar Swift (pic below) says the volumes in the market are driven by local institutional investors, who have been collecting following disposals by foreign investors. Meanwhile, retail investor participation continues to post record-high numbers as interest in penny stocks increased significantly, he tells StarBizWeek. Interestingly, in March when the movement control order (MCO) was implemented, the total industry registered an increase of 184% in new accounts compared with March 2019.
Volatility is good for business
Hong Leong Investment Bank (HLIB) Research in a May 18 report said the local exchange’s year-to-date (YTD) average daily volume (ADV) of RM2.6bil looked “like it could trump the highs of 2017 (RM2.3bil) and 2018 (RM2.4bil). A consequence of this is record earnings could be in the offing for the exchange, says the research firm.
“With that, it wouldn’t be too farfetched to envision Bursa Malaysia’s price to earnings re-rating to its previous highs of more than 30 times, which was last seen in the third and fourth quarter of FY18, ” adds HLIB, which sees Bursa Malaysia benefiting via robust ADV stemming from market volatility. The research firm expects a W-shaped trajectory for the local market which intuitively augurs well for ADV via heightened trading.
The higher retail participation in equities, according to HLIB, is positive for Bursa as it should result to higher overall implied rate earned on equities given the clearing fee (0.03%) cap at RM1,000.
However, there is also a concern that some level of “hot” money has come into the local market.
If so, what is the source of these funds? Are they from any form of ill-gotten gains? All money coming into the stock market does go through verification through a system called KYC or know your customer, explains Umar.
To be sure, there is potentially more volatility to come as investors reassess the full impact of Covid-19 to the economy and corporate earnings. This should benefit Bursa Malaysia, especially its trading revenue, according to analysts.
If Bloomberg data is anything to go by, research firms foresees Bursa benefiting post-pandemic too, as ADV sustains on an eventual market recovery. There are ten buy calls on the stock, while four firms keep a hold and two have a sell rating.
“Volatility is good for its business and Bursa is seen as being one of the very few listed companies that’s able to deliver strong earnings growth amidst Covid-19, ” says one analyst.
For the first quarter ended March 31, Bursa Malaysia’s net profit rose 38% to RM64.73mil on the back of RM150.75mil revenue. On its part, Umar says the exchange will continue to broaden its offerings to better serve the needs of the capital market and economy. Going forward, he says there is ample room for growth in the derivatives market considering that Malaysia continues to have a strong presence in palm oil-based industries.
What advice would he give retail investors, who have been flocking into shares in droves?
Umar says investor education has always been a critical component of the exchange’s strategy in growing its retail base.
“But ultimately, the best form of investor protection is achieved through investor empowerment – having the ability to ask the right questions and make informed decisions, ” he says.
SBW: There has been a fair bit of heavy volumes into the local market. Where is this liquidity coming from?
Umar: As foreign investors disposed of Malaysian equities due to the pandemic and global economic uncertainties, our local institutional investors have been collecting while retail investor participation continues to post record-high numbers as interest in penny stocks increased significantly.
As at end-April 2020, both local institutional and local retail investors were net buyers at RM6.43bil and RM4.03bil respectively.
It is also worth highlighting that retail participation has increased in recent years. In 2019, retail participation grew to 24.5% of the total market value traded, the highest level in the last five years.
We continue to see positive developments this year:
> The exchange saw a 96% increase in accounts opened in January to March 2020 vis-a-vis the same period last year.
> In March 2020, when the MCO was implemented, the total industry registered an increase of 184% in new accounts opened versus March 2019 (excluding Rakuten accounts opened).
> In terms of trading activity among retailers, March 2020 registered a 49% increase in ADV compared to 2019 ADV. Retailers were net buyers at RM2.89bil YTD.
These developments suggest that retail traders are becoming more well-informed and willing to seek out opportunities in stocks that they deem are undervalued.
Online trading, which is offered by most retail brokers, has also helped contribute to an increase in retail trading participation.
SBW: What levels of “know you customers” or KYC are being done on these funds coming into the stock market? Assuming it is a US dollar fund from abroad, does Bursa Malaysia or our local brokerages conduct KYC on such monies?
Relevant KYC policies and procedures are in place. Market intermediaries, i.e. participating organisations/brokers perform KYC on investors that come into the market.
New records are being broken in terms of volumes? How significant will this be for Bursa Malaysia’s earnings?
Trading is one of the key revenue contributors for Bursa Malaysia. Securities trading accounted for 48% of Bursa’s operating revenue for 2019. As such, strong trading activities can contribute positively to our financial performance.
That said, trading volume can be subject to shifts in market sentiments, which are influenced by a myriad of factors. Changes in economic outlook, corporate earnings and risk appetite are among the many contributing factors.
How sustainable are the increases in trading volumes? What are some other indicators to look at besides volumes, to judge whether the market is healthy and vibrant?
As mentioned earlier, trading volume can be subject to shifts in market sentiments, which are influenced by many factors.
The performance of the benchmark indices, i.e. the FBM KLCI, is one of an indication of market sentiment.
Currently, the FBM KLCI has rebounded by more than 15% from its low of 1,219 points on March 19,2020 while trading velocity stood at 43% compared to 28% in 2019.
Besides trading volume, we also gauge the vibrancy of the market by looking at market velocity through a review of the trading value against the market cap. Another indicator that we use to gauge the market’s vibrancy is the number of IPOs.
We believe our retail investor outreach initiatives have been gradually bearing fruit. It is a slow but sure journey. We will continue to enhance efforts to boost financial literacy to build a knowledgeable retail segment and ensure a sustainable marketplace in the long-term.
SBW: Have the high volumes started to attract foreign funds? Our illiquid nature was one of the reasons cited as to why foreign investors seem to shun our market before.
While higher volumes may indicate better liquidity, the broader macro-economic and geopolitical factors have resulted in a global risk-off sentiment with investors moving out of equities into other safer asset classes. This has spurred higher foreign outflows from Malaysian equities, a phenomenon that is not unique to Malaysia only but also experienced by all the emerging markets in Asean. Regardless of the market condition, Bursa Malaysia has maintained the continuity of its initiatives to ensure uninterrupted market access as well as promote the marketplace through various programs and channels.
We facilitate corporate access and sectorial initiatives via seminars and webinars in collaboration with our broker partners. These initiatives can help keep foreign fund managers abreast with the latest updates on listed companies as well as a view on market outlook to take advantage of investment opportunities in our market.
The initiatives above are further supplemented by the steps taken to align the Exchange towards becoming a developed and global avenue for fundraising and investing. Examples of measures implemented include:
> Migration to a two-day settlement cycle (T+2) from a three-day cycle (T+3).
> Expanded in trading features to enable a greater variety of trading strategies. This includes Market Order at Pre-Closing, On-Open Order, On-Close Order, Iceberg Order as well as One-Cancel-Other Order.
These enhancements can help boost market access and trading efficiency for a broad range of participants, especially foreign investors across varying time zones.
SBW: On expanding the exchange’s income stream with IPO pipelines seen to be slowing due to Covid-19?
Inevitably, near-term IPO pipelines are expected to be affected by Covid-19. Some companies that are ready to list may decide to “wait-and-see” and defer their listing plan in anticipation of greater certainty over demand and share price performance.
Nevertheless, we will continue to engage with potential issuers actively and to support capital raising activities during such testing times. Bursa has introduced a series of measures, such as the waiver of all listing-related fees.
Bursa is well committed to continue broadening of offerings to better serve the needs of the capital market and economy – in terms of fundraising, wealth creation and risk management. This supports our income diversification. For example, we are exploring opportunities with several potential partners to expand our data offerings.
Initiatives to diversify our revenue streams range from short-term quick wins to long-term efforts that will be covered as part of Bursa’s mid-term strategic roadmap for 2021 and beyond.
SBW: How is Bursa Malaysia, the listed organisation, weathering the pandemic?
Bursa is a high operating leverage business, where a high proportion of our costs are fixed (fixed cost: 70%, variable: 30%).
Given the continued uncertainty over the global pandemic and challenging operating environment, we have reviewed our activities and undertaken certain cost control measures. We are taking a prudent view of our expenditure, and we had also embarked on several Business Process Improvement initiatives internally to make our organisation more efficient. However, we will not sacrifice any short term gain over long term benefits. All the developmental work involving capital expenditure to improve market competitiveness and vibrancy will continue regardless.
SBW: Advice to retail investors considering we notice there is a decoupling in terms of market performance and the real economy?
Investor education has always been a critical component of our strategy in growing our retail base. We are committed to ensuring that investors trade in an informed manner. Our efforts in building investor protection are focused on three areas, namely, strengthening corporate governance, board effectiveness and investor education.
Ultimately, the best form of investor protection is achieved through investor empowerment - having the ability to ask the right questions and make informed decisions. Over the years, we have conducted numerous educational programs, through physical and online platforms, to educate the Malaysian public about stock investments.
SBW: How is Bursa positioning itself vis-à-vis other stock exchange’s around the region? Where do you see Bursa Malaysia’s prospects and value proposition?
In order to enhance our competitiveness in the region, we are focusing on the following 3 areas.
Firstly, Bursa Malaysia has strong leadership in the Islamic capital market with a strong potential to grow further. Approximately 77% of our listed stocks are Shariah-compliant, and almost 40% of our ETFs are Shariah-compliant.
We also plan to expand Bursa Suq al-Sila, our global Shariah-compliant commodity trading platform, into new regions.
We believe the shift towards ethical or value-based investing internationally also augurs well for Bursa Malaysia’s prospects. The convergence of sustainability, responsible investing and Shariah investing, is expected to deepen our competitive edge and make our offerings highly relevant to investors around the globe.
Secondly, there is ample room for growth in the derivatives market. Malaysia continues to have a strong
presence in palm oil-based industries. Our leadership in the palm oil suite of capital market offerings is, amongst others, a potential strong growth catalyst.
We are in discussion with several potential strategic partners to further strengthen our global accessibility, especially into Greater China. We are also exploring new services, including night trading for derivatives to enable trade activities outside our regular trading hours. Widening our breadth of derivatives products will also make our offerings more relevant. For example, we are working in concert with regulators to introduce physical settlement of MGS futures by September 2020, with the view to offer a more effective hedging platform for investors.
Thirdly, we are looking at strategic partnerships and collaborations to build upon these unique value propositions that will help shape Bursa’s future growth
SBW: Progress on the establishment of a wholly-owned subsidiary to assume the regulatory functions currently undertaken by Bursa Malaysia.
The Securities Commission (SC) and Bursa Malaysia have been working closely to further enhance the governance structure of the exchange by segregating its regulatory functions from its commercial objectives to address perception of potential conflicts of interest between these two roles. On February 25 2020, the SC and Bursa announced that Bursa Malaysia would establish a wholly-owned subsidiary (Bursa RegSub) to assume the regulatory functions currently undertaken by Bursa Malaysia.
Several workstreams have been established to finalise the implementation details, with the view to ensure a seamless transition of the exchange’s regulatory functions to the subsidiary. We are working towards operationalising the Bursa RegSub by the end of 2020.
Ultimately, we aim to create a forward-looking and well-regulated Malaysian capital market to ensure our continued vibrance and competitiveness on a global scale.
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