‘‘Malaysia: Bullish on bouncing back”. That was the advertorial placed by a group of companies in 1998 amid one of the worst financial crises in the history of Asia. In 2000, it appeared as though Malaysia had done just that but it was unfortunately not yet meant to be. A sequence of economic and geopolitical disasters practically arrested the country’s yearning for a return to normality, at least in the form of stable, albeit unspectacular, growth.
Thriving economy
The picture now is different. The Malaysian capital market, particularly, is currently thriving against the backdrop of a strongly recovering economy and improved sentiments. The markets were taken by surprise with the relatively robust GDP growth of 5.2% recorded in 2003, the strongest since 2000. External reserves reached an all-time high of $49.2bn at the end of February and the general consensus is that the ringgit’s exchange rate peg against the US dollar understates the ringgit’s underlying strength.
With capital control in force and liquidity piling up in the system as a result of Malaysia’s strong external position, the local appetite for investments in equity cannot be over-rated. Years of shaken confidence and depressed sentiments have built a level of pent-up demand unseen in corporate Malaysia. Nowhere else is this more evident than in the IPO market on the Kuala Lumpur Stock Exchange (KLSE). A total of 58 companies were listed last year, the highest since 1997.
The total amount raised in the equity market (including rights and warrants) last year was RM7.8bn (US$2.1bn). For the 58 IPOs last year, the first day closing price fetched an average premium of 47% over the offer price. In the first two months of 2004, the corresponding premium was higher at 78%.
The benchmark Kuala Lumpur Composite Index (KLCI) gained 22.8% in 2003. Yet it is still considered a “laggard” when compared with regional peers such as Thailand and Indonesia which returned 116.6% and 62.8% respectively. The markets in China, Taiwan, Korea, Singapore, Philippines, Japan and Hong Kong returned an average 34.2%. Indeed, Malaysia ranked last in the regional league table.
Back in the A-bracket
Malaysia is a laggard no more this year. For the first two months of the year, the KLCI had returned 10.7%, second only behind Taiwan (see table).
The optimism and interests in Malaysia are not unjustified. Malaysia is now back in the A-bracket, with Standard & Poor’s having upgraded its rating of Malaysia’s sovereign credit from BBB+ to A- in October last year. Political stability, which has been one of the mainstays of Malaysia’s value propositions is being used again to argue for the Malaysian market’s premium over regional peers. Indeed, the Malaysian government is arguably at its strongest point now since the outbreak of the financial crisis in 1997.
It is therefore unsurprising that the Malaysian equity market has outperformed the region, as represented by Morgan Stanley Capital International’s composite regional index since late February (see chart).
Malaysia is entering a new era in the development of its capital market. A lot of efforts have been initiated to elevate the status of the KLSE, once categorised as a “developed market” by Morgan Stanley Capital International, to a higher level.
To begin with, the KLSE has now been demutualised, and the holding company is bound for a listing this year. From the perspective of market participants, they can look forward to more liberalisations of the KLSE as a result of the demutualisation. A commercially driven KLSE will be more inclined to have as many participants in the market as possible. If the KLSE remains stockbroker-owned, it is unlikely to issue new trading participation rights to foreign players. With demutualisation, the exchange now has to consider all its shareholders and to realise that in a globalised economy, the removal of protectionist policies is inevitable. The exchange will be more inclined to introduce more products and services which will bring it more earnings and which will make the Malaysian capital market a more exciting one.
Avoiding conflict
In conjunction with the demutualisation, a framework has been put in place to address potential conflict, which may arise from a profit-oriented entity performing regulatory functions. To pre-empt the conflict, the KLSE has put forward a public interest framework which consists of six key components. These are:
- The demutualised exchange will have a balanced board structure representing public interests and shareholder-elected directors.
- Limits will be imposed on the shareholding and decision-making capacity of the demutualised exchange.
- Supervision of the listed entity will be by the Securities Commission rather than the exchange itself
- A Capital Market Development Fund (CMDF) will be established to ensure that market development efforts will not be compromised in the quest for profit.
- Operational and organisational structures will be such that the objectivity and independence of the exchange in discharging its regulatory functions are safeguarded.
- Risk management will be addressed by the introduction of adequate and appropriate risk management mechanisms not only in relation to the corporation but also in respect of investor protection.
The setting up of the CMDF is a particularly interesting point since the statutory trust fund will play a big role as it is intended to facilitate the development of an efficient, innovative and internationally competitive Malaysian capital market. The funding of CMDF shall be from the proceeds from the initial public offering.
Corporate governance
Malaysia has been much maligned in respect of corporate governance, or rather lack of it, in the past. Despite the challenges, Malaysia has made significant strides towards good corporate governance practices with the introduction of the Code on Corporate Governance. With it, the roles of independent directors have been clearly defined and shareholder activism given a new breath of life practically for the first time in corporate Malaysia. To enhance accountability and risk management, laws to encourage whistle blowing have been formulated to deter corporate malfeasance, in keeping with international practices. Legislations have been introduced to protect key company officials and auditors of listed companies from legal suits, discrimination or job termination when they report corporate malpractices to theauthorities.
Foreign investment
In the meantime, the authorities have made it easier for foreign companies to raise capital on the equity bourse. A major relaxation in the rules was introduced on September 19, 2003, when the Securities Commission issued the new Guidance Note 7A and B under the Guidelines on Issue and Offer of Securities. Prior to the relaxation, a company seeking listing on the KLSE had to be Malaysian-incorporated, have a majority of its operations in Malaysia and could be either Malaysian and/or foreign owned.
Following the relaxation, foreign listings on the KLSE can now be:
- Malaysian incorporated companies with substantial operations abroad and controlled by Malaysians;
- foreign-incorporated companies with substantial operations abroad and controlled by Malaysians;
- foreign-incorporated companies with substantial operations in Malaysia and controlled by Malaysians; or
- foreign-incorporated companies with substantial operations in Malaysia and controlled/owned by foreigners.
The reward for the bold measures that Malaysia has embraced is now apparent. The largest pension fund in the US, the California Public Employees’ Retirement System (CALPERS) recently readmitted Malaysia into its list of permissible markets, partly in recognition of the progress made on the corporate governance front. Research houses are recommending an increase in the weightage on Malaysia in fund managers’ portfolio allocation. The valuation of equities is creeping up, which means that investors are willing to pay more for a stake in the potential earnings of corporate Malaysia. Despite the gains since mid-2003, the upside in terms of valuation remains intact. The appetite for risk is growing and equity is back in vogue.
Integrated approach
The Malaysian Financial Market and Capital Market Masterplans envisage an integrated approach in the provision of financial services. Banking institutions will no longer be demarcated by the types of activities that they offer, and changes are in motion now with the common licensing of commercial banks and financecompanies.
In this regard, the Maybank Group, as the largest financial group in Malaysia, is looked to by the authorities to spearhead the changes. Given its strength and financial standing, the Maybank Group is invariably the first stop among capital-seeking investors. With an asset base of RM173bn at the end of 2003 and access to cheap funding, the Maybank Group is acknowledged as having the capacity to package a comprehensive financial solutions that best meet the needs ofborrowers.
This article was contributed by Maybank Group
