Make hay while the sun shines

While the Malaysian market has been the shining star of Asia this year … we cannot afford to rest on our laurels and expect the momentum to continue without the entry of new products or ideas into our capital market.

Merdeka! Tunku Abdul Rahman, Malaysia’s first Prime Minister and the founding father of the nation, raised his voice seven times proclaiming the independence of the nation and that was the beginning of a long journey of a new nation known as Malaya then.

Fast forward to 2024 and Malaysia is today 67 years old. By no means a young nation anymore and measured by human years, we are now in our golden years and certainly have come a long way.

Since the establishment of The Malayan Stock Exchange in 1960, the local bourse itself has gone through multiple transformations, both in name and in form.

From the united Stock Exchange of Malaysia, we parted ways in 1973 to establish the Kuala Lumpur Stock Exchange.

Thereafter, Bursa Malaysia was born 20 years ago, and today is one of the largest stock markets in Asia with a market capitalisation in excess of RM2.03 trillion.

Together with the bond market, which has a total market value of RM2.07 trillion, the Malaysian capital market is a matured market with a combined market capitalisation of RM4.1 trillion.

This translates to more than double the nation’s expected nominal gross development product (GDP) of RM1.93 trillion this year. Both the equity and fixed-income markets are slightly more than one times the nation’s GDP, which is commendable, given that Malaysia is very much an open economy.

The depth and breadth of the market today are the work of committed regulators, whether it is from the Finance Ministry, Securities Commission or Bursa Malaysia, as well as capital market intermediaries that have taken the bull by the horns, driving innovation and developing the market.

With more than 1,000 listed companies on Bursa Malaysia, the local bourse is ranked as the 10th-largest Asian bourse by market capitalisation.

In comparison, and based on the latest second-quarter (2Q) data as compiled by the AsiaBondsOnline website, and excluding central bank short-term papers, the Malaysian bond market is ranked fifth in Asia after China, Japan, India and South Korea, making it one of the most liquid and active markets in the region.

More compelling, when measured against the size of the economy, Malaysia’s bond market, which presently stands at 128% of last year’s nominal GDP value, is the second largest in Asia after Japan.

Confluence of factors

Post-2018 general election, Malaysia has been having a tough time convincing investors that the country has the right ingredients to attract long-term investments, mainly due to the perceived political uncertainty, especially after the Pakatan Harapan’s government collapse via the Sheraton Move.

However, this has since changed as a result of the 2022 general election.

The brilliance of the Yang di-Pertuan Agong to have a unity government was a masterstroke as not only did it cool down the political temperature but it brought together political parties, and representatives of all Malaysians.

The unity government, under Prime Minister Datuk Seri Anwar Ibrahim, certainly had its work cut out as the country needed urgent attention in terms of policy, direction and reforms.

While it did take them some time, the fact is that a slew of policies that were launched last year is beginning to bear fruit.

Malaysia’s approved investments jumped to RM329bil last year, while RM83.7bil approved investments were recorded in the first three months of the year.

The National Energy Transition Roadmap (NETR) was another game-changer that the government launched and it is a clear catalyst for investments into the utility sector with massive investments carried out under the renewable energy sub-sector.

This also opens up the space for large multinationals to be attracted to Malaysia to house their energy-hungry data centres.To-date, Malaysia has already seen more than 600 acres of landbank sold to multinationals worth in excess of RM3bil, with almost all the land deals transacted in Johor.

Malaysia’s ability to provide relatively cheap entry for data centre market players as well as the inexpensive cost of construction and utility supplies, when these facilities are up and running, are no-brainers for the big boys to set-up shop in Malaysia.

With a headline 5.9% GDP growth in 2Q, most economists have already upgraded their forecast for this year to be closer to the 5% mark, even before the ink was dry from the advance estimate that was released a month before.

Malaysia expanded at its fastest pace in more than a year, led by a booming construction sector and stronger growth in the manufacturing and services sector, while on the demand side, gross investments leap-frogged 11.5% year-on-year.

Malaysia’s strong data has also allowed the ringgit to rally – a major talking point among capital market players, while the stock market main index hit the highest level in almost four years.

The sweet spot that we are in today is also due to the massive uplift contributed by the banking stocks, which make up more than 40% of the index value.

It is often said and we have seen this in the past – we are only in a real bull market when the banking stocks start to move.

Otherwise, a market rally will fizzle out sooner or later. When these banking stocks rally and are near or hit all-time highs, it is a signal that the underlying fundamentals of the economy are expected to be strong, which will eventually lift the market even higher.

Foreign buying interest has been relatively modest with a year-to-date net inflow of RM2.61bil up to Aug 29, 2024.

Interestingly, of this total amount, some RM2.13bil alone was recorded this month. This suggests Malaysia is now on the radar of foreign portfolio managers, thanks largely to the confluence of factors.

The fixed income market too is a key winner when it comes to foreign inflows, and judging by the first seven months of this year, Malaysia has witnessed some RM8.7bil inflows, of which RM7.8bil inflow was recorded in July alone.

The strong inflow has pushed Malaysia’s gross international reserves level higher, with the latest reading at US$115.9bil – the highest since January 2022.

What’s next?

While the economy is humming and markets are booming, regulators and other capital market players cannot afford to rest on their laurels but continue to provide innovative and new product offerings in the market to make the Malaysian market not only relevant to local investors but also foreign investors.

In this space and for the fixed-income market, Malaysia should take advantage of its ability to issue sukuk papers for increasingly diversified and demanding investors wanting syariah-based Islamic papers.

Malaysia should also promote aggressively the capital market’s ability to provide green or sustainable-theme bonds to the international market.

For more sophisticated market reach, we should allow either US dollar-based papers or even multi-currency as this will widen our market reach and make Malaysia a strong base for bond issuances for foreign investors, especially for niche investors seeking sustainable or syariah-based investment papers.

As for the equity market, the pipeline for new initial public offerings (IPOs) has been strong this year and is likely to gain further momentum in the next couple of years, and driven by a slew of companies lining up to tap the capital market, Malaysia has not been a choice market for startups or companies without a good profit track record.

While there are opportunities to tap into the market for companies with a potential market capitalisation in excess of RM500mil and in operation for at least one full financial year, we are not seeing companies taking up this route.

Greater effort is needed to promote these companies so Malaysia becomes a choice listing destination.

Another area that Bursa Malaysia should tap into is to encourage dual-listing not only among large foreign-listed companies listed in regional bourses, but also to promote top Malaysian-listed companies to be listed in other regional markets as well.

This will encourage greater and wider reach among investors as well as profiling for the Asean bourse as a whole.

More ETFs

Exchange-traded funds (ETFs) are another cheap entry for investors wanting to diversify away from individual stock exposure but more towards index-based or a theme-based basket of stocks.

While Malaysia has some ETFs listed today, the size of the market remains relatively small, at just 0.1% of the overall market capitalisation.

Malaysia needs to promote ETFs based on indices outside the country as there are investors who want to buy certain internationally recognised ETFs but there is a lack of products available that are listed on Bursa Malaysia.

Regulators should look at how we can develop more interest in allowing globally recognised popular ETFs to be listed on Bursa Malaysia, but developed by local capital market players.

This could be ETFs that mirror the S&P500 Index, the Nasdaq Index or sector-based ETFs. It doesn’t take much to develop these products as they are recognised worldwide.

In summary, while the Malaysian market has been the shining star of Asia this year, and investors are reaping the benefit from the strong market rally, we cannot afford to rest on our laurels and expect the momentum to continue without the entry of new products or ideas into our capital market.

Hence, while we make hay while the sun shines, we must remain cognizant of the challenges ahead to keep investors’ interest in our vibrant capital market.

Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.

Editor’s Note: This column is taking a two-week break and will resume on Sept 21, 2024.