Cover Story: Waning retail interest?

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MALAYSIA'S stock market has grown substantially over the past two decades. Its trading volume has increased exponentially, with the average daily trading value for equities exceeding RM2 billion. Also, the benchmark FBM KLCI has hit new highs.

Last Thursday, Bursa Malaysia Bhd, the stock exchange operator, announced its highest full-year profit in seven years. Its fourth-quarter earnings jumped 57% year on year to RM53.14 million, underscoring the dynamism of the local bourse.

Some may attribute the stellar performance to the exchange’s solid technological infrastructure and a highly transparent regulatory framework. Furthermore, the strong presence of local institutional funds and government-linked investment money has no doubt help grow the domestic equity market.

But how often is it that you have had friends or relatives over for dinner saying that they have made a killing on the stock market? It is more likely that they will boast about how high the prices of their properties have climbed, rather than talk about where the FBM KLCI is heading.

The participation of retail investors in Bursa remains weak. The slight increase in the number of new trading accounts every year is an indicator of the trend.

In 2013, despite the strong post-election rally across the board, the opening of Central Depository System (CDS) accounts fell to its lowest in seven years. This could mean the rally failed to attract new investors, particularly the younger ones.

Between 2009 and 2013, the number of CDS accounts only grew from 4 million to 4.4 million, according to statistics from Bursa.

Is retail interest essential?

In terms of volume, the institutional funds are certainly far more impressive. Fund managers trade millions of shares in one transaction, compared with the retail investor, who probably buys only 5,000 units, or less, in one deal.

Bursa’s data shows that 74% of trades last year were done by institutions and the remaining 26% by retail investors.

This translates into an average daily trading value of RM530 million by retail investors, while the local and foreign institutions accounted for RM1.5 billion.

Having billions in hand to invest, fund managers are capable of moving the market.

That said, the velocity of Bursa was at 26.8% in January, which was relatively low compared with that of other bourses in Asia, for instance, Hong Kong (51.5%), Singapore (38.9%), Taipei (79.5%) and Bangkok (66.9%). It was only better than that of the Philippines (14.6%) and Indonesia (22.7%).

Bursa’s lower velocity in January was mainly due to the impact of falling crude oil prices, but it is a fact that relative to the other bourses in the region, Bursa’s velocity has been lower over the past few years (see chart on share turnover velocity).  

Velocity is regarded as a gauge of the vibrancy of a stock exchange.

“A low velocity means that a stock exchange is not very active ... high participation of retailers, who tend to trade for shorter investment horizon, can help lift the velocity,” says an executive at a local stockbroking company, citing the high velocity of the Taiwan market due to the active participation of retail investors.  

However, retail investors’ trading interest is not the only factor that can lift market velocity.

“Look at Wall Street. Retail participation is minimal in the US ... but there is a big pool of hedge funds that help churn trading volume,” the executive explains.

 On the home front, he notes that retail interest is not strong, and hedge funds’ presence is not much either.

“Perhaps the authorities may be clamping down too hard on speculative activity via restrictions on trading and its focus on greater retail investment through unit trusts. For retail participation to be strong, we believe there has to be an element of speculation. Just see how well markets in China, Hong Kong and Thailand are doing because of this,” says the  head of research of a major insurance firm with substantial investments in Malaysian equities.

The liberalisation of brokerage fees in 2002 and the proliferation of online trading have made it cheaper and easier for anyone to trade in shares on their own.

However, both these factors have resulted in profit margin squeeze in the stockbroking industry. Remisiers who work for non-bank-backed stockbrokers have long questioned whether there has been an improvement in retail participation at all, given its importance in boosting the market.

“Now that the commission is so low, why is participation still low? There is a crucial need for a financial intermediary service to guide investors in making tough investment decisions. If it goes on like this, there is no doubt that the industry will be gradually dismissed,” says Remisiers’ Association of Malaysia president Sam Ng.

Boom and bust in the 1990s

Hong Leong Investment Bank Bhd dealer representative Frank Lin remembers the stock market’s heyday in the 1990s, when jobs as remisiers were highly sought after.

chart_cs_1052“Taxi drivers and fishmongers didn’t go to work because they would rather invest in the stock market. The market was so hot,” he says.

Unfortunately, Lin says, the subsequent crash triggered by the Asian financial crisis created a negative perception of share investing, the effects of which still linger until today.

“When children ask their parents about investing in stocks, they tend to react negatively due to their past experience. The Gen Ys (those born in the 1980s) are now not keen at all to put their money in the market, which partly explains the little retail participation that we see now.”

After 1998, bull cycles tend to be shorter. Even now, as the market enters the sixth year of its longest bull run since the early 1990s, retail investors are still shying away from investing in equities on their own accord, preferring instead the relative safety of buying into mutual funds or investing in properties.

In spite of this, it is clear that there is now more money in the stock market than ever before. The total capitalisation of stocks amounted to RM1.65 trillion last year, slightly down from an all-time high of RM1.70 trillion in 2013.

The FBM KLCI was trading at 1,782.18 points as at Jan 29, compared with an all-time high of 1,892.65 points on July 8 last year.

The current winners and losers

It can be argued that most of the retail investors’ money has been channelled into the professional fund management industry over the past decade. The current high level of institutional participation is in line with the tremendous growth in the fund management industry.

According to data by the Federation of Investment Managers Malaysia, the total net asset value of the unit trust industry grew from RM43 billion in 2000 to RM358 billion as at last November.

This development, coupled with the already prominent presence of funds such as the Employees’ Provident Fund and Lembaga Tabung Haji, has resulted in institutions having a strong foothold in the market.

To date, growth in the unit trust industry remains a vital part of the government’s aspirations to make Malaysia a regional asset management hub.

As a key entry point project under the Economic Transformation Programme, the Performance Management Delivery Unit is targeting assets under management to grow to RM1.6 trillion by 2020, or the equivalent of the entire capitalisation of Bursa-listed stocks at present.

Looking for solutions

Bursa, along with investment banks, has been making a concerted effort to attract individual investors. Bursa has repeatedly emphasised the importance of the retail segment with the launching of BursaMKTPLC, a comprehensive stock investment platform, alongside various investor education seminars and youth outreach programmes.

In addition, Bursa has repeatedly partnered investment banks to hold virtual stock market competitions.

Improving retail participation will require the collective effort of Bursa, the Securities Commission Malaysia and investment banks, says Affin Hwang Investment Bank Bhd head of retail research Datuk Dr Nazri Khan.

“We should see greater awareness in trading, for example. But remisiers should also be more aggressive and read the market’s needs instead of just waiting for the customers to come. If you look at the markets in Hong Kong and the US, most of the remisiers have evolved to become market specialists, who can boost trading volume,” he says.


This article first appeared in The Edge Malaysia Weekly, on February 2 - 8 , 2015.