This article first appeared in The Edge Malaysia Weekly on November 13, 2017 - November 19, 2017

THE local stock exchange continues to underperform the international market despite synchronised growth on a global level because investors are looking elsewhere for investment opportunities.

“I think we are in a sweet spot now, globally, in terms of the economy. This is a very unusual time when all the major economic blocs are seeing synchronised growth — slightly sub-par but synchronised,” says Dr Neoh Soon Kean, founder and executive chairman of Dynaquest Sdn Bhd, a Penang-based investment consulting and publication firm.

“The US is recovering nicely, as is Europe. Japan, after 25 years, is at last recovering. As for China, its economic growth rate seems to have touched bottom and is starting to accelerate again.

“All the four major blocs of Japan, China, Europe and America are growing at decent rates. Apart from China, we expect about 2.5% growth on average for the other three blocs,” he points out.

While the FBM KLCI has seen a year-to-date return of 9.1%, the MSCI All Country Asia ex-Japan Index has surpassed it more than four times to 39.6%. The MSCI World Index has exceeded the local benchmark as well, seeing a total return of 19.6% year to date. Regionally, the FBM KLCI has underperformed most of its peers except for China’s Shenzhen Stock Exchange Composite Index.

The stronger world economic growth led to a rally on the equity markets of the US, Japan and Europe recently. However, notes Neoh, the Malaysian stock market lagged behind because of a slowdown in the “factors of production”, which are crucial for long-term economic growth.

“I am not very optimistic about Malaysia. In order to grow, a country needs to see continuous fresh injections of what economists call the factors of production. Classical economists believe these are land, labour and capital. In recent years, however, some economists have added another factor of production — entrepreneurship,” he says, adding, “In Malaysia, these four factors of production are dwindling.”

Neoh believes the country’s supply of land and natural resources has been shrinking over the last several decades. For instance, land suitable for the cultivation of rubber and oil palm has shrunk in recent years, forcing plantation companies to move to countries like Indonesia and Africa to expand their production.

At the same time, Neoh points out, local crude oil production has not only declined but the prices have dropped to US$55 to US$60 per barrel. Malaysia has also lost its position as the world’s biggest producer of tin to become one of its smallest.

To top it all, the country’s ageing population has become a drag on its economic growth. Consider that in the four years up to 1996, employment grew 2.65% per annum but in the four years up to 2016, this had shrunk to 2.07% per annum. In order to offset this deceleration in the natural growth of the population, Malaysia has had to “import” a huge number of migrant workers.

At its peak, Neoh notes, foreign labour made up a huge portion of the addition to the local workforce. But in the four years up to 2016, the growth in foreign labour dropped to 1.13%.

“If you talk to the plantation companies, they will tell you that one of the biggest problems in the industry is shortage of labour. Over and above this problem, available statistics suggest that growth in labour productivity has dropped greatly in recent years,” he says.

One of the reasons for the slow growth in labour productivity appears to be the relatively sharp decline in private investment. Last year, private investment as a percentage of gross national product fell to 17.76% — almost half what it was 20 years ago.

Neoh also highlights a sharp fall in the number of entrepreneurs. As a result, investors are pretty much stuck with the same tired selection of old economy companies, he says.

“There is a paucity in the number of fast-growing participants in the ‘new economy’. If you look at the top 100 listed companies by market capitalisation, how many of these are in new industries? Where is our Tencent? Where is our Ranbaxy?” Neoh asks.

Another setback for the Malaysian stock exchange is the historical premium that has been priced into it, which makes it more expensive than some of its peers, for example, Singapore, despite the higher growth potential of a number of these countries.

“In terms of price-earnings valuation, local stocks are also more expensive than those of Hong Kong and Singapore, which have an average PE of 14 and 12 respectively. They probably have higher growth potential, in my point of view,” Neoh says.

While he is not as optimistic about the Malaysian equity market as he is about the global stock market, Neoh notes that the local bourse still provides a decent and reasonable return for most investors compared with an alternative investment.

He advises investors to look for companies with good fundamentals, such as financial soundness, management strength, growth and stability, which could be viewed objectively in terms of their track record.

“Looking at the valuation and growth potential of a typical Malaysian company, I think it would be difficult for an investor to record a 15% annual return like he could in the past. But I think it is still possible to get something like 8% per annum, which may be considered very good, considering that the fixed deposit return is only about 4%. Their expectations must be realistic and they would have to really work at it to get such returns,” Neoh concludes.

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