This article first appeared in Forum, The Edge Malaysia Weekly on September 5, 2022 - September 11, 2022
Looking back at nearly 60 years since the formation of Malaysia in 1963, we should be both proud of and somewhat whimsical over our achievements and missed opportunities.
Malaysia had one of the most vibrant stock markets at the point of Independence, having inherited the stockbroking business from firms trading shares in British plantation and mining concerns, trading houses, and banks and British consols (consolidated government debt) in Malaya during the colonial period. Local brokers in Singapore, Kuala Lumpur, Penang and Ipoh traded among themselves, since settlement and clearing in listed stocks would have to be done ultimately in London. The Singapore Stockbrokers Association was formed in 1930 and renamed the Malayan Stockbrokers’ Association in 1937.
In 1960, the brokers’ association became the Malayan Stock Exchange with 19 member firms — 10 in Singapore, four in Kuala Lumpur, three in Penang and two in Ipoh. The four Kuala Lumpur members then met regularly to “call” shares and mark prices. With the installation of telephone links between trading rooms in the four cities, a single market was created.
By 1964, there were 25 member firms of the Exchange and 269 companies listed, of which 82 were Malayan companies, 37 Singaporean and 150 foreign (mostly British) companies. Of these, 133 were in rubber and plantations, 55 tin mining, and 68 industrial and general, which presumably also included banks. By 1964, four British companies created local branch registers in Malaysia to facilitate transfers and settlement.
PJ Drake’s pioneering 1969 paper, “The New-Issue Boom in Malaya and Singapore, 1961-64”, provides illuminating data on the early days of the Malayan stock market. Between 1961 and 1964, there were 25 new listings seeking 137.4 million Malaysian dollars (M$) in new share issue, which attracted subscription offers of M$1,646 million. This meant that initial public offerings were 12 times oversubscribed, indicating huge interest and capital available for speculation and investment. In 1963, the amount of money tied up in share subscription for just nine new listings was M$949 million or 12.4% of gross domestic product, a phenomenal sum in those days!
Unfortunately, there are few good studies on the boom years of Malaysian stock trading. I still recall coming back from Britain as a fresh chartered accountant, wondering how OCBC shares could rise to M$50 in 1973 and then crash 93% two years later to M$3.58 (Rangel, 2010). OCBC shares have not reached that level since.
By 1981, the market capitalisation of the Kuala Lumpur Stock Exchange (KLSE, today Bursa Malaysia) was 61% of GDP, compared with 80% of GDP for the total assets of the deposit banking system. Malaysia had reached serious levels of financial deepening compared with other developing economies. That was the reason why KLSE was the darling of the emerging markets, when advanced markets first discovered that higher returns and market liquidity could be found in less developed stock markets. In 1993, the KLSE market cap rose to 321% of GDP, when the banking system’s was 104.7%. This meant that corporate captains could fund investments out of their market cap, which was nearly three times larger than bank assets in the market’s heyday in the 1990s! In other words, you could sell your shares on the secondary market to fund your other investments in stocks, real estate or fixed assets rather than borrow from the banking system or through the debt market.
All this came crashing down with the 1997 Asian financial crisis. By 1997, the stock market cap had declined to 93.2% of GDP, whereas the banking system’s had grown to 149%. During the 2008 global financial crisis, the stock market cap was down further to 82% of GDP, compared with 102% for the banking system. Since 1997, the stock market cap has not exceeded the banking system in terms of fundraising. As at 2020, the stock market cap was 130% of GDP versus 159% for the banking system.
This big picture of the country’s financial structure meant that overseas analysts began to worry about the country’s growing debt burden since the macro-equity base did not match that of the debt and loan market. Of course, the rest of the world had the same growing leverage problem. But a relatively shrinking stock market base meant that financial systems are becoming more and more fragile with less and less equity.
Malaysia’s weighting in the MSCI Emerging Market Index fell from nearly 30% in the late 1980s to 1.3% by 2021. This is not surprising since the MSCI index today includes China (nearly 40%), India, Saudi Arabia, Turkey and other growing stock markets. In terms of portfolio flows into emerging markets since 2010, China has grown 31 times and Asean-4 by seven times, whereas Malaysia has grown by only three times. Within Asean, Malaysia had the smallest growth in market cap since 1998 of only four times, versus 26 times for Indonesia and 17 times for Thailand.
The reasons for the laggard standing are complex. But investors are concerned about the attractiveness and quality of listed companies in Malaysia. The main listed heavyweights are government-linked companies that have done well in terms of dividend payouts, but are not exciting in terms of technology and value-added. Worse, companies such as rubber glove and rubber plantation firms are being downgraded by foreign investors because of allegations of the use of forced labour, or killing orangutans and not being eco-friendly.
Basically, in the last two decades, the total value of funds raised through bank loans and debt has overtaken that of equity funds raised. There are therefore many deep-seated issues to be studied in depth.
There are two major reports on financial market development: the Bank Negara Malaysia Financial Sector Blueprint, 2022-2026, and the Securities Commission Malaysia’s Capital Market Masterplan 3, 2021 to 2025. Given these foundational reports, I find it surprising there are so few deep analytical studies by Malaysian academics on these structural trends on long-term national savings and the policy implications going forward.
Of course, capital markets are critical to our national strategic goals, which face major competition from our Asean neighbours such as Indonesia, Vietnam and the Philippines, each of which have populations of more than 100 million and are growing at 5%-6% per year. Because the Economic Planning Unit is responsible for the Malaysia Five-Year Plans and development allocations, the Ministry of Finance for fiscal policy, Bank Negara for monetary and financial policies, and the Securities Commission for capital market development, we seem to lack an integrated-thinking approach that combines the expertise at the sectoral levels with a holistic geopolitical perspective of where the nation is going and how to get ahead of the competition. Each report is laudable in intention, but the receding competitiveness is of serious concern.
A silo approach with good aspirations by every agency means that the private sector may be finding that investing outside the country may be more lucrative than investing domestically. A depreciating ringgit makes overseas diversification attractive. Because banks and public markets are highly regulated, the trend is more regulatory arbitrage or drifting towards private equity to deliver higher returns for an elite group of investors. In 2022, the Canadian Pension Plan Investment Board allocated 32% to private equity, more than the 27% allocated to public equity. Private family offices holding high-value wealth are becoming more important players in global markets.
Environment, social and governance or ESG concerns are the flavour of the month, but may not necessarily deliver as good revenue results as old-fashioned tobacco, oil and gas and plantation companies. In short, financial markets may not be as inclusive as they often claim to be. And whether the financial sector can help the real sector become green without “greenwashing” is subject to serious debate.
These paradoxical or Condivergence issues will be explored in coming articles.
Tan Sri Andrew Sheng writes on global issues that affect investors
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