NOT ONE TO IGNORE

Malaysia 2017 | FINANCE | REVIEW: CAPITAL MARKETS

Ever innovative, Malaysia's capital markets are stretching the field through local innovation and regional initiatives.

Malaysia has made the most of its capital markets in step with Vision 2020, its national program of economic diversity and inclusiveness. It is today a major investment magnet resilient both to externalities and abuse. As Sandeep Singh, Country Head-Malaysia & CEO and Head of Islamic Business at Franklin Templeton GSC Asset Management, put it in a TBY interview, “In terms of investing in Malaysia from a strategy standpoint, some invest on the basis of a country theme, while others view Malaysia within the concept of an ASEAN, or an Asia Pacific play.” Indeed, foreign investors are well aware that “ASEAN is well over 600 million people, and Malaysia is a key member of it.” Meanwhile, the ASEAN Capital Markets Forum (ACMF), currently chaired by Datuk Ranjit Ajit Singh, Chairman of the Securities Commission Malaysia, has propelled Malaysia's presence in the wider financial arena.

In late 2016 the IMF, noting that the mood at the capital markets was notably determined by global factors including a potentially more active US interest rate program, as well as risk aversion. Ideally, the IMF stated, Malaysia should deepen its capital markets with a diversity of investment stories to mitigate against volatility. “We would like to see domestic life insurance companies, or pension funds play a part as, by definition, their liability is lower and they can afford to invest, while foreign funds specializing in infrastructure can also stay through ups and downs in an economy,” the IMF suggested.

Tuning the Engine

The government is already on the case. In shoring up systemic weak links, sector reforms have included introduction of the Liquidity Coverage Ratio (LCR), which sustains financial institutions' levels of high-quality liquid assets as a buffer against any short-term liquidity challenges. Back in 2011 the central bank Bank Negara Malaysia (BNM) had also pledged to adopt the Basel III criteria to bolster existing capital and liquidity standards. As of June 1, 2015 with a minimum LCR of 60%, rising annually to 100% in 2019, Malaysia's capital market continues to inspire investor confidence.

New Life-Breathing Initiatives

In fact Malaysia's capital markets are nothing if not dynamic. As well as pioneering strides in the sukuk market, of which more later, among key advances we note the Securities Commission Malaysia's (SC) broadening of private retirement schemes (PRS), the introduction of a Fund Disclosure Guide, and setting of fresh guidelines for venture capital, private equity-based crowd-funding, and unlisted capital market products to widen the appeal on both the traditional Bursa Malaysia exchange and the Alternative Stock market.
In another innovative step, Australian financial concern Macquarie Capital Securities pioneered call and put warrants over the Standard & Poor's 500 (S&P500) on Bursa Malaysia as of June 30. This enabled Malaysian investors access to key global markets. Bursa Malaysia in 9M2016 facilitated multi-currency fixed income instrument activity across a web-based Electronic Trading Platform. It also launched an enhanced three-year, five-year, and 10-year Malaysian Government Securities Futures contract. Meanwhile, global index provider FTSE Russell launched the FTSE4Good ASEAN 5 Index, an Environmental, Social and Governance (ESG) index developed with the ASEAN exchanges.

SMEs

The government fosters growth of the nation's SMEs, major employers hungry for fresh capital sources. At close to 100% of all of Malaysia's registered businesses, SMEs are also catalysts for innovation, by definition, across a wide spectrum of activity. The Securities Council (SC) has duly introduced the SME Investment Partners program extending non-collateralized financing from private investors. Most recently, while announcing his 2017 budget, Prime Minister Datuk Seri Najib Razak announced a new small and mid-cap Public Listed Company Research Scheme, valued at MYR3 billion, geared at 300 firms, to galvanize the local capital market. According to the latest BNM data, for 3Q2016, while on an annual basis, outstanding business loans appreciated at a slighter 2% as at end-September (end-June 2016: 3.8%), the annual growth in outstanding SME loans remained high at 8.2% (end-June 2016: 9.2%).

Sharia Investment

Malaysia's vast sharia-compliant capital markets universe is determined by the Shariah Advisory Council (SAC) of the SC. According to Ismitz Matthew De Alwis, Executive Director and CEO of Kenanga Investors Berhad, “There is a global Islamic wealth pool of around USD11-12 trillion that could be unlocked in the years ahead.” In fact, another key development of the 9M2016 period was the signing of an MoU with Indonesia's stock exchange for specific sharia-related collaboration. The period also saw the launch of Bursa Malaysia-i, which the bourse billed as “the world's pioneering fully integrated Islamic securities exchange platform,” geared at local and foreign attention.

It is worth noting that while the nation's capital market was worth MYR2.82 trillion at end-2015, with the equity market on MYR1.7 trillion and the fixed income market on MYR1.12 trillion, total Islamic assets had appreciated by a CAGR of 10% between 2010 and 2015. Sukuk products (two-thirds of the global total), at close to 60% of Malaysia's capital market, are then, clearly a key contributor to broader national development. As of June 2016, 73.9% of 905 listed securities were sharia compliant. And at MYR1.03 trillion, they accounted for 62.2% of total market capitalization.

2Q2016: Equities...

At the start of December 2016 Malaysian stocks had seen their highest weekly performance in two months in the wake of sentiment-boosting record gains on US indexes. Yet the preceding 3Q2016, the picture was more deflated, as the FBM (FTSE Bursa Malaysia) KLCI shed a slender 0.1% to close at 1,652.6 points at end-September (end-June 2016: 1,654.1points). The quarter had started well, fueled by foreign investor interest amid expectations of further monetary easing and fiscal stimulus among advanced markets. Perceptible rises in global oil prices, notably in mid-August, had also buoyed sentiment. Yet the second half of the quarter saw a reversal as regional bourses flinched over the pace of US interest rate normalization, while oil prices again went south. MCap scaled RM1.69 trillion as at end-September 2016, just outpacing the end-June print of RM1.66 trillion. Daily average turnover, too, climbed to 1.87 billion units (2Q 2016: 1.77 billion units). Since 2008, foreign investor participation has been in the low to high 20%s, closing 2015, and 9M2016, on 27%. Meanwhile, the same may be said for the share of retail trading during the period. For 9M2016, the retail to institutional breakdown was 22% to 78%.

Bonds...

Demand for Malaysian bonds has been in evidence, although for 3Q2016 total trading in the secondary market had fallen to MYR269.1 billion (2Q2016: MYR286.9 billion) amid investor wariness ahead of pending US Fed moves. Net funds raised in the capital market notably shrank to MYR13.5 billion (2Q2016: MYR33.4 billion), reflecting substantial government debt securities redemptions. Bond yields saw a further quarterly decline as Malaysian Government Securities (MGS) yields slid due to sustained non-resident demand. Their share rose to 51.3% of total MGS outstanding (2Q2016: 49.8%). Consequently, the three-year, five-year, and 10-year MGS yields respectively slid 27, 13, and 19bps. Meanwhile, private bond market yields fell due to domestic demand whereby yields on five-year AAA and AA-rated corporate bonds slid 12 and 11 bps, respectively, for the period.

... and Futures

Confirming the vital contribution of the commodity to the broader economy, as of 9M2016, palm oil futures comprised 80% of total annual contracts (10.8 million in all), followed by FTSE Bursa Malaysia Kuala Lumpur Composite Index futures on 19% and others on just 1%. Bursa Suq Al Sila' (BSAS) is a commodity trading platform dedicated to Islamic liquidity management and financing, facilitating Islamic interbank placements and client deposits and financing by combining the global Islamic financial and capital markets and commodity market on a single platform.

Well organized and dynamic, Malaysia's capital markets are plugged into the mains of regional activity and, given the right sentiment, have still wider appeal.