This article first appeared in The Edge Financial Daily on October 9, 2018

KUALA LUMPUR: Malaysian equities are increasingly going off the radar of international investors, as the heavy involvement of government-linked institutions in publicly-listed companies has limited trading liquidity and led to distorted valuations, said an asset management firm.

“The government is too active, too involved, and too big in activities that are best left to a free market to operate. There is a certain crowding out effect for the private sector here,” said Value Partners Group Ltd chairman and co-chief investment officer Datuk Seri Cheah Cheng Hye.

Speaking at a press conference at the opening of its Malaysian branch yesterday, Cheah said that from an international investor’s point of view, the structural problem of the Malaysian equity market lies with practices of the “almost mandatory buyers” who end up distorting free market prices and valuations.

He said this in reference to government-related institutions, such as Khazanah Nasional Bhd, Employees Provident Fund, Lembaga Tabung Angkatan Tentera, Kumpulan Wang Persaraan (Diperbadankan) and Permodalan Nasional Bhd, which are consistently accumulating shares in publicly-listed companies, and freezing their portfolio thereafter.

“One unforeseen effect is that it shrinks the size of the free market available for investors,” Cheah said, adding that the free float level of the Malaysian stock market today is the lowest in the region at less than 35%, when ideally it should hover between 40% and 60%.

Daily turnover so far this year has averaged at US$600 million (RM2.49 billion) per day, which he believes is unsatisfactory too, when compared to performance at other markets such as the Hong Kong Exchanges and Clearing (HKEx) that is easily 25 times more.

However, Cheah said it is not all doom and gloom as the ideal 40% to 60% free float level is achievable if the government-linked corporations pare down their shareholdings.

He added that the Malaysian market remains attractive as it is relatively stable, boasts strong connectivity to Asean and the Middle East, and is one of the most advanced economies in the region.

Value Partners, now a HKEx-listed asset management firm, was established in 1993.

Its Kuala Lumpur branch — which has received approval in principle from the Securities Commission Malaysia for a Capital Market Services License for Fund Management — will serve as a hub in Southeast Asia for product development, investment and distribution.