Insight - Caution over share margin financing

“We continue to closely monitor trading using margin financing, ’’ said Bursa Malaysia. “To date, trading in the marketplace using margin financing is not large.’’ Bigger exposure: An investor monitors share market prices at a brokerage in Kuala Lumpur. With the recovery in the stock market, the industry exposure to share margin financing has since climbed back to RM6.1bil as at Sept 15.

SHARE margin financing, which refers to borrowing from a bank or broker to buy shares, can help investors make a profit in an upmarket.

But when share prices go down, these investors can face margin calls, where they are asked to top up money into their accounts or close out their positions and sell their shares, to bring their accounts back to the minimum value.

When they do not meet these margin calls, their open positions can be closed out via force selling.

In the recent rally that was largely fuelled by glove-related stocks, questions emerged on whether the run-up in share prices of glove counters was mostly funded by share margin financing.

“We continue to closely monitor trading using margin financing, ’’ said Bursa Malaysia. “To date, trading in the marketplace using margin financing is not large.’’

As at Dec 31,2019, margin exposure for the industry was RM6bil.

Due to the declining market in March, this amount was reduced to RM5.1bil as of March 31. With the recovery in the stock market, the industry exposure to share margin financing has since climbed back to RM6.1bil as at Sept 15.

Still, there is a lot of caution prevailing, as the initial euphoria of glove and many other stocks generating extraordinary returns will likely wear off at some point.

There is a finite amount of monetary resources that can be channelled to keep doubling share prices again and again.

While well-capitalised brokers use share margin financing to raise extra revenue in the form of interest income as well as bigger trading volumes, credit risks are to be managed; they are using their own balance sheets and do not have deposit-taking channels.

“The exchange has put in place adequate mechanisms and measures to manage excessive volatility such as the dynamic and static price limit, and circuit breaker.

“During this period of heightened volatility caused by Covid-19, we continue to assess and refine the effectiveness of our regulatory measures, with heightened vigilance in our market surveillance, where appropriate.

“We will remain vigilant and prudent to ensure continuous stability and confidence in our marketplace during these uncertain times, ’’ said Bursa Malaysia.

In relation to margin financing, measures have been put in place to mitigate the force selling pressure on the market, and safeguard investors’ interest in respect of those who have pledged their shares for financing.

These relief measures, effective since March 27, were due to expire on Sept 30, but have been extended to Dec 31.

As part of the measures, force selling may not be imposed and other types of collateral, apart from shares, may be accepted.

“Following feedback from brokers, the exchange has evaluated and believes that other types of collateral such as unquoted bonds, unit trusts, gold and immovable properties are acceptable to secure the margin accounts, ’’ said Bursa Malaysia.

However, since the market recovery between April and August, there has been minimal pledging of such collateral to brokers.

On the possibility of a further extension of these flexibilities, Bursa Malaysia “will continue to assess prevailing market conditions, and the effectiveness of these temporary measures by the end of the year before making any recommendation to the SC for a decision.”

Previously, brokers were required to force sell on their clients’ margin accounts if their equity value fell below 130% of the outstanding balance.

These temporary measures are subject to brokers meeting their capital adequacy ratio which remains at healthy levels; as of March 31, the average capital adequacy of brokers was 15.7 times, which increased to 17.3 times as of Sept 15 (the minimum requirement is 1.2 times).

Trading activity remained robust; year-to-date till September, Bursa had an average daily trading value of RM3.9bil and velocity of 62%, compared to RM1.9bil and 28%, respectively, as of end of 2019.

“This signifies sufficient liquidity to enable efficient price discovery for all market participants, ’’ said Bursa Malaysia.

A day before the start of the conditional movement control order last week, the International Monetary Fund (IMF) said Malaysia’s real gross domestic product (GDP) is expected to grow by 7.8% next year.

The World Bank said, at end September, that Malaysia’s economy could grow by 6.3% next year, on assumption of Covid-19 containment measures and resumption of economic activities.

RHB Research has upgraded its real GDP growth forecast to 7% on assumption of mass vaccine deployment in the second half of 2021, said RHB Research Institute chief Asean economist Peck Boon Soon.

With the global economy next year still 6.5 percentage points lower than pre-Covid-19 projections made in January, export growth is expected to only recover the loss in demand as seen in 2020, thus charting only a modest growth path.

Growth in private investment remains limited, said RHB Research, as capacity utilisation is projected to remain low until the latter part of next year.

For 2021, Socio-Economic Research Centre expects growth at 5% on a potentially stronger second half; this is against a low base of minus 4% in 2020 where growth may decline to between minus 4.5% to minus 5% if a third wave of Covid-19 infections prolong, said executive director Lee Heng Guie.

The outlook for next year depends on virus and vaccine developments and a sustained revival of private sector growth.

Can growth of 6% to 7%, if achieved for 2021, be sustained beyond that?

Some industries may disappear; structural changes such as increase in automation will affect the labour market, and hence, consumption trends, said former chief economist, Malaysian Rating Corp Nor Zahidi Alias.

The situation is uncertain, but hope still prevails for better times; one thing we should guard against is the creation of artificial markets.

Yap Leng Kuen is a former StarBiz editor. Views expressed here are her own.

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