TWO decades after the devastating Asian financial crisis and the dot-Com bubble burst, retail or individual investors have once again returned in a big way to Bursa Malaysia, to the point that they have become a stronger buying force than foreign investors and local institutional funds.
Retail investors are not just ruling the local stock market in terms of trading volume, but also in terms of the money they pour into the market.
To put it into perspective, the value of shares traded by retail investors was RM32.3bil in June, which compares significantly to the foreigners’ RM14.6bil and local institutional funds’ RM30.28bil.
In comparison, a year earlier, retail investors’ value of traded shares was only RM5.48bil.
The unexpected surge in retail participation, which took off since mid-March this year, was a major factor that spurred the mini bull run as the FBM KLCI leaped by about 30% in a span of just four months.
Stocks in the small- and mid-cap universe were the clear winner in this retail investor-fuelled rally. The FBM Small Cap Index, for instance, has surged by about 67% from its year-to-date on March 19.
The flood of retail investor-driven liquidity came at the right time to support the local market, considering that foreign funds have been dumping local stocks.
Foreigners have been net sellers for 22 consecutive weeks, and so far in 2020, foreign investors have sold net RM17.8bil on Bursa Malaysia.
But the scenario is no different elsewhere in Asia where foreign fund outflows have largely been the case this year.
The surprise for any veteran investor this time around has been the return of the retail investor. The recent euphoria largely consists retail investor participation and it is reminiscence of what transpired during the height of the super bull run in 1993 and the second board bull run in 1996.
There are, nevertheless, several features that may explain how the latest episode of retail investor surge differentiates from the 1990s.
The ability to do online trading and a robust flow of information, on top of the increase in risk-taking young investors, have made the retail investor story more compelling and different than in the 1990s.
The concern is, however, on whether the retail investors are making informed investment decisions or are they part of an investing herd mentality.
Herd mentality, or the tendency to follow and copy what other investors are doing, while could further fuel a rally, would be detrimental when panic selling or heavy profit taking begins.
Retail investors are typically prone to herd mentality, and in a market full of uncertainties and volatility, they could easily succumb to the market forces unless they are backed with good holding power.
In addition, there is also a huge concern on the flow of stock-related information in today’s world.
In recent years, there have been an increase in online blogs and discussion platforms that focus on listed stocks, much off the books as it would appear from what the regulators are focused on. This is not unique to Malaysia alone, but also to other countries.
While the rise in virtual stock talks have amplified the flow of information out there, it has opened a floodgate for manipulation and unverified information in the market.
Self-proclaimed investment gurus have been providing stock-related ideas or analyses, to the point that uninformed retail investors could easily fall prey to wrong or skewed information. Hence, it is now up to Bursa Malaysia as the market regulator to ensure that retail investors are protected and to clear the market for manipulation.
Bursa is watching
In a reply to StarBizWeek, Bursa Malaysia says that its continuously monitors news sites and investment blogs.
“If we come across a report containing material information, we will engage the relevant listed issuer to ensure compliance with the listing requirement.
“We will not hesitate to take appropriate enforcement actions against the listed issuer or its directors, should there be a breach of the standard of disclosure under the listing requirements. It is our priority that investors are provided with accurate and timely information with which to make investment and trading decisions, ” it says.
The stock exchange operator points out that it also conducts real-time trading surveillance across the market to ensure timely detection and conduct measures to deter abusive trading practices.
This is to facilitate genuine price discovery that contributes towards building and maintaining market confidence.
“Whenever trading irregularities or manipulation is determined, Bursa Malaysia will initiate engagement with the relevant brokers or market participants to highlight and communicate its concerns so that the necessary review actions can be undertaken, ” it says.
To be sure, retail participation has been gradually increasing over the years, which has only grown even stronger this year.
In 2019, retail participation grew to 24.5% of the total market value traded, the highest level in the last five years.
Bursa Malaysia attributes last year’s stronger retail involvement to its year-long Retail Invest Year campaign.
“We plan to build on the strong momentum from last year and continue to introduce initiatives that will make it more compelling for the public to start trading.
“Our strategy includes measures that will take advantage of the digital and mobile trends to provide retail investors with a seamless digital journey on Bursa Malaysia, ” it says.
Why some are optimistic that the retail investor has returned has been the data on account openings over the past several months.
The number of new retail investors have risen significantly, judging by the overwhelming applications for the Central Depository System (CDS) trading accounts which some brokers say has created a backlog.
Bursa Malaysia, on its part, has recently introduced the feature that allows the public to open CDS account remotely via its Bursa Anywhere application.
“Over 14,800 CDS account opening applications have been received since the June 2020 launch of the service. Out of which, 45% were between the ages of 26-35, ” says the stock exchange oeprator.
Meanwhile, online trading platform Rakuten Trade saw a 450% increase in new account openings in the first half of 2020.
According to its acting chief executive officer and chief marketing officer Kazumasa Mise, between March 18-June 30, Rakuten Trade has activated almost 50,000 accounts.
“If one compares this to more than 100,000 accounts activated since our start in May 2017, about half of the total accounts were opened in just these four months.
“This surge was driven by retail investor participation during a time when the contactless mode was preferred as well as the availability of good value stocks due to the state of the capital market at the time.
“Many shares were below their historical prices, creating an opportunity for new investors to enter the market, ” says Mise.
Interestingly, about 80% of Rakuten Trade’s clients are below 40 years old and have less than three years’ of trading experience. It is hoped among the brokers that the influx of new and younger investors will herald in the next generation of retail investors but there is one important caveat to that.
“It is important for retail investors to be financially literate and not just digitally savvy.
“Whether they are new or seasoned investors, we believe financial education and sharing of digital trading insights are essential to create a more informed investor base, ” he says.
To be fair, Malaysia is not the only country witnessing a boom in retail investors. Other countries in the region such as South Korea, Thailand and Indonesia have enjoyed a similar trend in recent times, particularly post-the coronavirus pandemic.
According to a news report by The Jakarta Post last month, the total retail investors’ trade in Indonesia rose by 86% in June 2020 alone, with the fastest growth coming from investors aged between 18 and 25 years old.
While it remains to be seen on how long the high levels of retail investor participation could be sustained, it is inevitable that it has tremendously helped to boost market liquidity as retail investors move in and out of stocks relatively quicker than foreign investors and local institutional funds.
This was a key reason that helped many stocks to experience phenomenal growth in share prices in a matter of months, especially the glove stocks where the rise in Top Glove’s share price has made it the second largest company on Bursa Malaysia.
“Many of the stocks that have increased in price this year moved ahead of their earnings, driven by expectation. In some cases such as for the glove stocks, we saw that the companies did perform in terms of earnings.
“But, this may not be the case for all stocks. Back in the 1990s, we saw stock prices rising by unimaginable levels, even without being justified by fundamentals. All you need is an announcement or agreement signing, and the share prices can shoot up, ” a veteran trader said.
During the 1990s Second Board bull run, it was common to see stocks trading above the RM100 limit, unlike today.
Stocks such as biscuit maker HwaTai Industries Bhd and auto parts trading company Repco Holdings Bhd were trading over the RM200 and RM140-mark respectively.
“Retail investors dominated the market then (prior to 1997). Many of these investors were not properly informed about the stocks, partly because there wasn’t enough access to information like we have today.
“Also, back then, the T+7 settlement cycle was in practice. So, this allowed retail investors to speculate, buy and sell in a week’s time just to ride on share movement, ” he says.
Under the T+7 cycle, investors were required to pay cash for their trades or sell the acquired shares in seven days’ time.
However, Bursa Malaysia has since amended the settlement cycle and currently, T+2 is in practice in line with other major global exchanges in the US, Europe and Asia-Pacific.
Interest rate factor
According to Affin Hwang Capital deputy group managing director Yip Kit Weng, the recent surge in retail investor participation appears to be the most convincing for decades.
“As the stock market turned robust in recent months, the central bank’s decision to cut interest rates, the most since early 2009, further helped investors to realise that equities could be a better choice knowing that the low interest regime is here to stay or could worsen.
“A fair and orderly market to-date has strengthened market confidence to encourage a sustainable stock market, ” he tells StarBizWeek.
Yip further adds that the strong market supervision by Bank Negara, Bursa Malaysia and the Security Commission has ensured that the market remains healthy.
“The current rally only serves to remind investors of the importance of appropriate market risk management. Investors are now generally smarter and more informed, mainly due to collective investor education initiatives by regulators, investment banks and stockbrokers and other independent providers, ” he adds.
Moving forward, in order to ensure that retail investors stay invested at current participation levels, Yip believes that there is a pressing need to enhance financial and investing literacy at an earlier stage in the educational system.
The regulators must also ensure the stock market is not over regulated, promote investor education and knowledge and enhance the availability of information about the market and its listed companies.
As for the brokers, Yip says technological developments are necessary to improve the level of service delivery and quality to clients.
“Intensify efforts to elevate retail participation through increasing investor awareness and outreach, ” he says.
A more robust stock market benefits investment banks significantly as the profitability will generally improve in tandem and would also spur corporate developments or exercises.But, there are also other multiple contributing factors such as the economic environment that they operate in, the strength of the capital market cycle (whether it is a bullish or a bearish market), retail and institutional participation, market share, and the operating cost effectiveness.
“And on this note, we have seen improvements of over 40% in our retail market share and 65% in overall value traded of our securities business for the first half of 2019 (1H19) versus 1H20, further strengthening our standing as Malaysia’s number one stockbroker in value and volume for past six years, ” says Yip.
Over the longer term, while much attention has been given to boost retail participation in the local bourse, it is also important to entice foreign investors back into Bursa Malaysia.
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 experienced by all emerging markets.
However, Bursa Malaysia says that the pace of foreign fund outflow has slowed down towards the end of June as risk appetite improves and the FBM KLCI outperforming its regional peers.
“With global investors now reallocating towards safer assets, Malaysian equities have remained resilient and offer unique investment opportunities.
“Recently, we held two virtual instalments of our flagship Invest Malaysia conference, which saw the participation of close to 2,000 institutional investors and corporates from around the world.
“Such initiatives help keep foreign fund managers abreast with the latest updates on listed companies, as well as a view on the Malaysian market outlook, thereby enabling them to take advantage of investment opportunities in our market, ” says Bursa Malaysia.