Malaysia’s regional trading ambitions curbed by local problems

Malaysia’s stock exchange was among the region’s most buoyant four years ago. Its problems since then reflect not only the country’s political and economic uncertainty, but also its difficulties in attracting foreign investment.

The flotation of Malaysian palm oil producer Felda was the biggest initial public offering in Asia of 2012, raising $3.2bn at a gloomy time for new listings globally. In the same year, Asia’s biggest hospital operator, IHH Healthcare, raised $2bn with a listing in Kuala Lumpur and Singapore.

For Bursa Malaysia, the country’s stock exchange, that blockbuster year illustrated the effectiveness of Malaysian companies in raising capital. But one of the main reasons for that success has hobbled the country’s ambition to become an entry point to Southeast Asia for global investors.

Malaysia’s thriving pension schemes encourage asset managers to use their significant pools of savings to buy domestic equities. So while companies have easy access to capital, prices on Bursa are high, and trading is low as institutions tend to buy and hold — resulting in less attractive securities for foreign investors. “It is really a recycling tool of domestic savings,” says Herald van der Linde, head of Asia Pacific equity strategy at HSBC.

On price-to-earnings ratios, Malaysia is the third most expensive equities market in the region after India and the Philippines, Mr van der Linde says.

Bursa’s chief executive, Tajuddin Atan, told shareholders this year that the exchange has a “clear strategy to become a regional leader and Asean’s multinational marketplace”.

As things stand, however, Malaysia’s exchange lacks the depth and liquidity to attract global investors, analysts say. The high valuations of Malaysian stocks also deter outside investors. Foreign investors pulled out net RM 19.5bn ($4.7bn) last year and RM 6.9bn in 2014, according to MIDF Research. So far this year, foreign equity investments are up net RM 0.2bn.

The average daily traded value of Bursa’s securities market declined slightly last year, falling to just over RM 2bn ($480m). The comparable figure for SGX, Singapore’s stock exchange, was S$1.1bn ($800m).

Bursa tried to attract more business from foreign derivatives traders with roadshows in the US last year. This brought in some new market participants. The bourse has also identified Islamic finance as a potential growth market. Revenue from Bursa’s equities market fell 3 per cent last year on lower trading from domestic investors, but overall revenue grew due to rising contributions from derivatives and Islamic finance.

It is really a recycling tool of domestic savings

The Felda listing was a boon for Malaysia’s prime minister, Najib Razak, as it provided a windfall of discounted shares for thousands of workers. The IPO boosted the premier’s popularity ahead of the 2013 general election.

But since then the political climate has turned. The scandal around Malaysia’s 1MDB state investment fund, from which more than $3.5bn has allegedly been diverted, has battered the ruling class and clouded investor sentiment. Mr Najib, who set up the fund and chaired its advisory board, denies any wrongdoing, as does the fund.

The scandal has had repercussions for the exchange. Plans for a $3bn stock market listing of 1MDB’s power assets were first postponed and then abandoned as the fund grappled with questions about the scale of its debt. The assets were later sold to China General Nuclear Power Corporation for $2.3bn.

The 1MDB affair — which is being investigated by the US and Switzerland — underlines concern about weak governance in Malaysia. Foreign banks and potential investors fear becoming entangled in regulatory inquiries.

Since 2012, listings have dropped. Bursa had 11 last year, raising RM 21.2bn, down from 14 that raised RM 24.3bn the year before. Malakoff, a power producer, was a notable listing last year, raising RM 2.7bn. In general, though, the exchange faces a scarcity of companies of the right size and quality. However, 2015 was a lacklustre year across the region. SGX attracted just one listing of more than S$150m last year as well as 12 smaller ones.

The outlook for Malaysia, and Malaysian companies, is downbeat. Economic growth has slowed for five consecutive quarters, dropping to 4 per cent for the three months to the end of June. Exports have weakened while government finances have been constrained by the oil price slump.

Yet politics offers the potential to revive Malaysia’s corporate fortunes and those of its stock exchange. There is speculation in Kuala Lumpur about a general election next year, possibly as early as March, with traditional giveaways expected.