Business

Saturday July 25, 2009

Whither stock market?

By TEE LIN SAY


Is the Malaysian market heading for sustainable growth and what is the prospect of foreign direct investments? Analysts and dealers give their views.

ON April 3, Datuk Seri Najib Tun Razak succeeded Tun Abdullah Ahmad Badawi as the sixth prime minister of Malaysia.

The stock market skyrocketed with his arrival. On that week, the Kuala Lumpur Composite Index (CI) raced 4.37% to 907. In all the market appreciated 32.8% to 1,152 as at Thursday from the time Najib ascended to the top position.

»It is liquidity which is driving this market« SCOTT LIM OF MIDF AMANAH ASSET MANAGEMENT

At first glance that seems like an endorsement of Najib but fact is most stock markets around the world went up too during the period. For example, Hong Kong went up 36.24% to 19,817 points, Singapore was up 36.48% to 2,484 points, China performed strongly, rising 37.57% to 3,454 points, Indonesia was up 44% to 2,160 points and India went up 47.19% to 15,231 points.

For Malaysia, a new prime minister meant new hopes and expectations and investors kept a close watch to see how he was doing. While many moves Najib announced would take time to work through, many investors and fund managers felt they were positive.

But these announced measures alone will not necessarily lead to an out-performance of the Malaysian markets compared to other regional markets, analysts say. However, the immediate prognosis is still for markets, including Malaysia’s, to move upwards in the short term while there may be some correction later from too rapid a movement up.

Meanwhile, Najib got right down to work. Most would say his first 100 days have been almost flawless. He pushed all the right buttons with his slew of policy changes.

In end-April, Najib announced liberalisation of the services sector, bringing an end to the 30% bumiputra ownership condition under the New Economic Policy (NEP) in 27 subsectors.

During Invest Malaysia, an investment conference, on July 1, he made monumental changes when he announced that all transactions on mergers and takeovers by local or foreign companies will no longer need Foreign Investment Committee (FIC) approval. All listed companies also need not maintain 30% bumiputra equity as required previously.

He also allowed a 100% ownership for qualified and leading fund management companies to set up operations in Malaysia. Foreign equity in existing stockbroking companies would be increased to 70% from 49%,

»Fund managers will be forced to participate« CHOONG KHUAT HOCK OF KUMPULAN SENTIASA CEMERLANG

Certainly, the removal of the 30% bumiputra equity participation was the most significant, as everybody knew that it had outlived its usefulness.

Instead of benefiting bumiputras, it has become a strain on the economy, deterring foreign direct investment (FDI) and nourishing a culture of mediocrity, all of which hindered growth.

A blip

Still, there are cracks and concerns.

Grabbing headlines and stoking public outcry is the recent death of political aide Teoh Beng Hock. Teoh, 30, was found dead on the fifth floor of Plaza Masalam in Shah Alam on July 16 after being interviewed for at least 10 hours by the Selangor Malaysian Anti-Corruption Commission (MACC). He was interviewed in connection with allegations that certain state assemblymen were misusing constituency funds.

“For the longer term prospects of Malaysia’s economy, we cannot afford to have such suspicions over the abuse of power among those who are supposed to safeguard our interest,” says a fund manager.

That episode reflects and highlights a continuing concern over governance and accountability standards, which some observers say, Malaysia needs to address as part of its ongoing reform programmes.

Associate director of OSK Research Chris Eng says that while Najib’s track record may not be flawless, it is unfair to pinpoint the MACC’s wrongdoing on him.

»Security is still an overall concern in the urban area« CHRIS ENG OF OSK RESEARCH

“The MACC did not stem from Najib or his administration. This legacy came from the previous two administrations,” he remarks.

Kumpulan Sentiasa Cemerlang Sdn Bhd head of research Choong Khuat Hock says Malaysia’s old legacies of corruption and racial bias remain.

“Najib has come out with a great concept – the 1Malaysia concept. His challenge is to push hard for change. He needs to change the bureaucracy to create a just and fair society. The reality on the ground has to be equal with his rhetoric.

“Najib needs to execute what he says. He needs to show us that our government is transparent,” says Choong.

With political and economic risk increasing in Malaysia, what are the market’s hope for sustainable growth and the continuous inflow of foreign direct investments?

Certainly in the last two weeks, Bursa Malaysia (along with the rest of the world) rallied, when it staged a 91-point runup to 1152 in 10 days days with volumes averaging 1.02 billion shares.

MIDF Amanah Asset Management’s chief executive officer and chief investment officer Scott Lim says there are now more believers of the global economic recovery.

“It is liquidity which is driving this market. The market is running ahead of its fundamentals. Hence, the market will continue to find reasons to rally. The market is taking people by surprise,” Lim says.

He says that later down the road, the market will adjust to reality depending on whether the market stages a recovery or worsens.

“Yes, Najib has made some very positive announcements. Now he needs to follow up with execution. My checks around have shown that foreign participation remains rather muted,” he adds.

Lim says foreigners do not see Malaysia as being relatively cheap to the region. Foreigners are also concerned with the political and economic structure of the country.

»Local investors can opt for more dynamic markets« DATUK YUSLI MOHAMED YUSOFF OF BURSA MALAYSIA

Kumpulan Sentiasa Cemerlang Sdn Bhd head of research Choong Khuat Hock says foreigners do invest a little in Malaysia, not so much on its appeal, but because of its laggard attributes.

“While we’re not seeing a very strong recovery, things are also not getting worse. Malaysia is not that important a market. China and Hong Kong will still dominate.

“Markets are now swarmed with liquidity. With nearly US$24 trillion spent on global bailout plans, there’s a lot of liquidity sitting in the system. This is boosting the market including ours. I believe many fund managers will be forced to participate as the market continues to rise,” Choong says.

Lim wants to see real action following the liberalisation measures announced by Najib.

“It could be still too early to tell. We’ve had way too many false starts. That is why many investors are frustrated and give up hope. I’m no longer interested in baby steps. I want to see delivery and results.”

Lim says the first steps have been made – which were the policy changes.

“Now we need to see the whole chain of events happening – the knock on effect. The machinery has to kick in. Reduce the processing time. Cut the red tape. These are all old issues which we have been harping for ages,” he says.

OSK Research head Chris Eng agrees: “Lets walk the talk. We need to sort out the corruption issue.”

For instance, Eng says that feedback from Singaporean investors show a lack of keenness to invest in the Iskandar Development project until the issue of security is settled.

“Security is still an overall cause of concern in the urban area. When foreigners come here to work, especially in the service sector, they want to feel save. And they have said that unless this security issue is resolved, investments will be limited.”

Should Malaysia be able to create a safe and friendly environment, Eng opines that Singaporean money will likely pour in. On this note, Lim does not see compelling reasons for Malaysia to stand out at this point in time. If things remain the way they are, Lim does not see light at the end of the tunnel.

“As it is, Malaysia is already marginalised, and we’ll continue to be marginalised if things don’t change. Hence, foreign investors won’t be in a hurry to plough money back into the market.”

Holistically, Lim says the priority should be to restructure the economy.

“The export story is over. We know that. We now need to add value to the economy. To get new investors in, we should restructure the domestic economy,” he adds.

Economists are all expecting exports to continue to slump in the months ahead.

CIMB Research anticipates exports to average RM61bil per month during June to September 2009. This pace of decline should moderate in the fourth quarter, as global, regional and domestic indicators point to an easing pace of deterioration, and firmer commodity prices soften the blow.

Of volumes and liquidity

A dealer who has been trading the Malaysian market over the last 10 years says it is getting increasingly difficult to do so. He adds that foreign transactions have been insignificant. Over the last two weeks, locals made up some 80% of the volumes.

“Yes, you see 1 billion volumes being transacted in the last two weeks, but there’s no real liquidity in the market. Retailers are definitely not in. They are actually very few participants in the market. It is just the institutions that are supporting the market,” the dealer says.

On this note too, he says foreigners do not view Malaysia as an attractive market.

“They cannot short our market because it goes up very easily. Under the FBM 30 index, the top 5 stocks already make up some 50% of weightage. Once these stocks move, the index goes up, hence there is no opportunity to short. And for the foreigners to buy now, there is no upside. Hence what do they do? Exit the market of course,” says the dealer.

Meanwhile, in a report by Singapore Business Times, Bursa Malaysia chief executive officer Datuk Yusli Mohamed Yusoff says that the local exchange does not have enough large companies and the problem is compounded by the Government’s huge shareholding in many of these entities.

Yusli’s priority is to reduce the Government’s stake in these firms as it would improve trading liquidity and velocity. The mid-term goal is to achieve an average velocity of 60% from over 30% at present.

Yusli went on to say that the reality is that a lot of the small to medium-sized companies trade at very high velocities. Dragging them down is the low velocity in the bigger companies. Hence the board of directors in those companies need to set the tone.

Yusli also knows that multinationals will often put international financial centres first.

“Even Malaysian companies and local investors can opt for more dynamic markets. That’s the challenge for us – to make sure we can retain investors as well as attract new investors,” the report quoted Yusli.

New listings

Meanwhile, Bursa Malaysia aims to attract as many as 40 new listings a year as the easing of investment rules in the country helps draw foreign investors.

Bursa attracted 23 listings last year and 26 in 2007, down from 40 three years ago. So far this year, the only local listing is Samchem Holdings Bhd.

As the recent rally has been rather strong, Choong says stock picking becomes more important as the easy money has been made.

Eng is not a buyer of the market, and would be selling into strength. He feels valuations are stretched although he likes cyclical plays like the oil & gas and steel.

He is adopting a defensive strategy and will be buying the gloves, gaming and food sectors.

Choong, too, likes the rubber gloves sector for its recession-proof features. Selectively he will look into the construction sector as it is a beneficiary of the stimulus package. He says that the fiscal stimulus is slowly trickling in although it will take more time.

Eng says a lot of the stimulus package funds has been disbursed to the respective ministries although the actual awarding of contracts has yet to be executed.

On a more positive note, the dealer sees the region improving over the next few months. Ten years of building reserves have allowed the Asian economies to stimulate their way back to much more vigorous rebounds than the developed nations. He predicts a bull market by early next year.

“Malaysia will go up in tandem, but as usual, on a slower pace and with less wealth enhancing effects,” a dealer concludes.

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