Lead Story: Malaysia is most expensive at 15.6 times PER

This article first appeared in Capital, The Edge Malaysia Weekly, on December 3, 2018 - December 09, 2018.
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IT is not the policies of the new government or the noise from the 1Malaysia Development Bhd (1MDB) debacle that have kept foreign investors on the side of caution when it comes to investing in Malaysia. It is the fact that the local stock market is still an expensive buy, at about a 50% premium to the MSCI Emerging Markets Index.

Kirsty McLaren, client portfolio manager for emerging market equities at UK-based asset management firm Schroders, tells The Edge in an interview during the 2018 Schroders International Media Conference  last month in London that Malaysian equities are expensive compared with those of other emerging markets.

“[Looking at the] 12-month forward price-earnings ratios (PERs) for the MSCI ASEAN markets, they are all more expensive than the MSCI Emerging Markets Index, which is at 10.4 times.

“The MSCI Indonesia is the cheapest at 13.6 times PER, while the Philippines is at 15 times and Thailand at 14.1 times. Malaysia is the most expensive [among the Asean markets] at 15.6 times,” she says.

Another issue for international investors is liquidity. “The liquidity of the Malaysian market is not great and that has been an issue, particularly for international investors.

“Also, one of the things that the new Malaysian government said it is going to look into is the oligopolistic and monopolistic industry structures, and it is going to be proactive in looking into regulatory and competitive environments. While that may well be very good for Malaysian citizens, it can be very negative for certain companies’ profits as well, and you have seen this in the [Malaysian] telecommunications sector recently,” McLaren says.

Another point to note is that the Malaysian stock market has not seen any exciting initial public offerings since 2012, which saw the listing of Felda Global Ventures Holdings Bhd, IHH Healthcare Bhd and Astro Malaysia Holdings Bhd, which raised RM20.8 billion in total.

“In terms of IPOs, I agree it has been a very quiet market for many years and IPOs happen either through privatising state (government) assets or you get them from start-up companies that grow and develop. And I think that perhaps encouraging an environment in which there is a more vibrant start-up culture is one way to go [to invigorate the IPO market] and looking at assets on the state’s balance sheet is another,” McLaren says.

On whether the 1MDB revelations had spooked foreign investors into thinking that corporate governance in Malaysia is weak, McLaren replies in the negative. “Malaysia has voted in a new government in a very transparent and democratic process … it is acting very rapidly to clear the 1MDB issue up. So that says very good things about corporate governance in the country going forward. 1MDB is one of the many scandals you see in emerging markets and the actions that have been taken by the new government are strongly positive.

“However, we are not as confident as the government on its ability to retrieve some of the [misappropriated] 1MDB funds. We think it could be challenging and it could also take a very long time,” she says.

Another area of concern for foreign investors is the country’s fiscal deficit. Although rising oil prices are supposed to beef up to the country’s coffers and in turn help improve the country’s fiscal position, McLaren says the recent improvement in oil prices was not necessarily a demand-driven one.

“The high oil prices are not necessarily a demand-driven phenomenon. Obviously, there are supply considerations in play with some production lost in Venezuela and the reimposition of sanctions on Iran. So the supply picture has become difficult and this has contributed to the volatility in oil prices.

“In aggregate, high oil prices are not positive for emerging markets. Generally, there are more losers than winners. Malaysia is typically a winner in this kind of [higher oil price] environment and, normally, we would be more positive on Malaysia, but we are slightly concerned about the statements made by the government in the recent budget. The government said that there would be more reliance on Petronas for dividends coming through.

“Like everyone else, we thought positively of the election outcome, as the new government has done positive and transparent things such as bringing some of that off-balance sheet debt onto the balance sheet, but clearly the fiscal problems are bigger than what was thought. So, we are concerned that there are issues surrounding consumption spending and infrastructure spending — and therefore issues for [economic] growth — and it is not as straightforward as it was in the past,” she says.

McLaren, who joined Schroders in January this year, has been covering emerging markets since the early 1990s and recalls the Malaysian government’s imposition of capital controls on Sept 1, 1998, prohibiting the repatriation of funds.

“As international investors, we are obviously concerned that any country we invest in does not impose capital controls nor act to restrict our access to capital markets, and we think that it sends a negative signal to international investors if you put restrictions on how they can move their capital,” she says.

Before the unpopular capital controls, Malaysia had been the darling of the international investing community in the early 1990s. That changed in 1998 when the ringgit was pegged to the US dollar at 3.8 in a move to stabilise the currency and economy. Many Southeast Asian currencies had been heavily sold down by speculators, which set off a chain reaction that halted the rapid growth in many of the region’s economies.

As a result of the capital controls, the world’s largest indices provider, MSCI Inc, removed Malaysia from its developed market index as well as the MSCI Emerging Markets Free (EMF) and MSCI All Country (AC) free indices on Sept 30. Malaysia was only readmitted into the EMF and AC indices in May 2000.

Going into 2019, McLaren says things could look brighter for emerging markets relative to developed markets. “We think that the strong US dollar, which has been a key headwind for emerging markets this year, will start to abate, as the US gets to 3% interest rate by the middle of next year and pauses. You will also start to see the eurozone moving into quantitative tightening as well.

“So, you will see a reduction in the relative attractiveness of the US versus the rest of the developed world and that will no longer be positive for the US dollar … as you know, a strong US dollar is generally negative for emerging markets,” she says.

Schroders believes that active management based on deep specialist knowledge and resources is key to navigating complex markets. The firm is one of the largest emerging market asset managers in the world.

According to a report by asset management and distribution analytics firm Cerulli Associates, Schroders was the largest foreign master fund manager in Malaysia in 2017 with assets under management for its feeder funds amounting to RM5.59 billion.


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