This article first appeared in Capital, The Edge Malaysia Weekly on December 27, 2021 - January 2, 2022

COMING off a stellar 2020 in which trading volume and value on Bursa Malaysia hit all-time highs, investors were betting that 2021 would deliver another strong year. However, a resurgence in Covid-19 infections that caused new lockdowns and restrictions, worldwide supply chain disruptions and political unrest have seen the market reverse course.

Indeed, industry stakeholders — from remisiers, traders and stockbroking firms to the stock exchange operator — wrapped up 2020 with record high profits, benefitting from the heightened trading activities. The market rally in mid-2020 was fuelled not only by stockbrokers’ credit line but also fresh money from retail investors, underpinned by the low interest rate environment and ample liquidity arising from the loan repayment moratorium.

Alas, the bull market failed to hold up. The average daily trading volume of securities on Bursa has declined significantly, to less than three billion shares on Dec 20 this year (see chart) after hitting a peak of 27.796 billion shares on Aug 11, 2020.

The average daily trading value has also fallen, by 83% to RM1.726 billion on Dec 20 this year from its record high of RM10.447 billion on Aug 4 last year.

The market went through a reality check as the “investing fever” in Malaysia subsided this year. Going forward, with the foreseeable dampening effect from a stamp duty hike for stocks from 0.1% to 0.15% next year, coupled with the anticipation of rising interest rates — theoretically not favourable to equity markets — what does the future hold for local stockbroking firms?

Citing a 2021 Rakuten Insight Malaysia report, Rakuten Trade Sdn Bhd CEO Kazumasa Mise says new traders, who had previously never traded in equities before last year, continued to invest in 2021 despite the challenges faced by the market.

“These new traders are not just saving their money but also investing in order to build a more stable financial future. It would be fair to say the year has witnessed dynamic shifts that have impacted both the market and the industry in general after the exceptional performance of Bursa in 2020. What’s important is how we respond to these changes,” he tells The Edge.

According to him, being a fully digital broker meant that Rakuten Trade was already fully equipped to facilitate the shift to more stock trades taking place online due to the pandemic-imposed movement restrictions and other challenges.

Mise adds that Rakuten Trade, which turned in its first profit in April 2020, remains profitable this year, thanks to the consistent trading activity of retail investors. He also attributes the positive performance to the fully digital nature of its online stockbroking platform, its ease of use and lower fees compared with other local brokers.

“Our clients get access to a myriad of services, from lower brokerage rates and free participation in corporate action activities to a day trade rebate programme via our contra account that helps day traders pay less on their fees,” he says.

Mise declined to say whether 2021 was a reality check for Rakuten Trade.

“For us, this is not a clear yes or no situation. There was some levelling of the trend following last year’s burst of activity. However, we have continued to see significant retail participation on our fully digital platform for much of this year. So clearly, retail investors continue to be a key contributor to the market,” he says.

As at Nov 30, Rakuten Trade had activated almost 235,000 trading accounts on its trading platform, handling almost RM95 billion in total trading value on Bursa since its first business day. Rakuten Trade’s retail market share was almost 8% at the end of November.

Maybank Investment Bank Bhd (Maybank IB) head of investment management Azzahir Azhar deems 2021 an eventful year.

He recalls that for the first half of the year (1H2021), the stock market’s barometer — the FBM KLCI — was relatively range-bound as the nation contended with lockdowns and an increase in daily Covid-19 cases.

Going into the second half, the market continued to be volatile with the political uncertainty and a renewed Movement Control Order (MCO), followed by optimism over the vaccine rollout and the gradual reopening of the economy.

“While there was a lot of excitement in the market last year, particularly around the glove counters, many market observers were quite aware that the momentum from those plays would not carry on indefinitely. Arguably, even the most optimistic stockbroker would have factored in some level of reduction in overall market activity for 2021 as compared to 2020,” Azzahir tells The Edge.

Notwithstanding the decline in overall trading volume this year, he observes that retail participation remains higher than in the years prior to 2020, indicating that perhaps there are some longer-lasting effects from last year, and investors have continued to invest and trade instead of exiting the market entirely.

For context, average retail participation on Bursa was 19% in the pre-pandemic years (2018 to 2019). In comparison, the average retail participation for the period of 2020 to October 2021 was 34%.

Azzahir opines that many retail investors are still tracking the market closely, reading financial news and research reports, and learning online. In a nutshell, money management and investing are here to stay.

“Our house view is that while equities will have a supportive backdrop with the expected growth in the economy, strong commodity prices and accommodative fiscal and monetary policies, the market will continue to face headwinds from policy uncertainties ahead of the 15th general election,” he says.

“Our research team believes the best-case scenario for the market would be an early general election, as this would help to remove any policy uncertainty that is weighing on the market,” he adds.

A CEO and executive director of a local securities firm, who asked not to be named, points out that 1H2021 saw the stock market maintaining its momentum of 2020 volumes.

Unfortunately, due to the prolonged lockdowns and the impact they had on businesses, investors and the majority of public listed companies have faced the brunt of income contractions. As a result, trading volumes in 3Q2021 reduced to pre-pandemic levels and remained subdued.

“Stockbroking companies would have fared relatively well in 1H2021, but for 2H2021, it has been challenging, especially for stockbroking firms which carry high fixed overheads. Fortunately, our firm has so far managed to maintain its performance,” the CEO says.

Moving forward, he says, stockbrokers, dealers and remisiers as well as stockbroking firms will need to be innovative in their services, given that digitalisation and increased internet access and familiarity have led to investors trading predominantly online.

“Institutional investors have also begun to move their focus abroad for better yields, besides the withdrawal of foreign investors from the local market. This has contributed to lower trading activities,” the CEO notes.

As technology has changed the stockbroking industry landscape, Rakuten Trade’s Mise urges market players to adapt quickly.

“The environment has become more innovative, the customers are more tech-savvy, while regulations and policies have become more dynamic. Stockbroking companies need to embrace new technologies and digital innovation, or risk being left behind as we move towards the next normal,” he warns.

While Rakuten Trade anticipates more cautious trading patterns in 2022 due to the change in stamp duty fees, Mise believes that it will be an opportunity for digital brokers to be more attractive because they are already offering an efficient and cost-effective platform to trade on.

“Given that our client base is made up solely of retail investors, having a customer-first mentality is key to retaining these investors. Our services are combined with a viable trading platform and access to education as well as research ideas tailored exclusively to meet the needs of retail investors,” he says.

Going into 2022, Maybank IB’s Azzahir concedes that the key challenge for the stockbroking industry would be whether the level of retail participation will be maintained. It also remains to be seen if intraday traders will be able to sustain their current level of trading on the back of the upcoming increase in stamp duty for contract notes.

“The global market is expected to be more volatile in 2022, with record highs for US stocks, the US Federal Reserve’s rate increase and inflationary pressure. Traders will be watching the market risk closely. In terms of opportunity, we believe that given the still-low interest rates, the dividend yield theme provides an avenue for investors looking for income stability,” he says.

The CEO of the local securities firm expects a reduction in trading activity and revenue for the local market in 2022. He, however, remains cautiously optimistic that the local regulatory authorities have the right focus on areas that will build the future of the local capital markets, especially the emphasis on liberalisation and technology.

“The stock market serves the investing public regardless of boom or bust, in capital raising and reallocation of assets. There will always be opportunities to take advantage of, realign one’s portfolio, pick gems or take profit,” he adds.

He notes that corporate advisory and activities will always be needed even in trading downcycles. Therefore, stockbroking firms, with substantial market share in this segment will perform better in 2022.

“The local stockbroking industry is also undergoing constant evolution and we may see the emergence of different niche services. This reflects a robust industry that is ripe for innovation,” he says.

Maybank IB’s Azzahir highlights that a theme that has garnered a lot of attention lately is environmental, social and corporate governance (ESG).

“To help our clients capture opportunities in ESG investing, Maybank IB has introduced ESG tear sheets in our research reports, as well as introduced an ESG portfolio based on a combination of our analyst insights and risk scoring from Sustainalytics,” he says.

Azzahir points out that the stockbroking business, both in Malaysia and globally, has become increasingly competitive, and margin compression can be seen for both the retail and institutional client businesses.

Hence, any financial institution that is able to offer a wide range of solutions, be it corporate finance, advisory, debt and equity capital markets or derivatives, will be better positioned to serve various client segments while diversifying its revenue sources.

“At Maybank IB, we began the remodelling of our investment management pillar earlier this year with the aim of delivering greater value to clients. Instead of shopping for investment products from different brokers and advisers, our clients will have one single-point source for advisory and portfolio building via our client solutions team, who will work closely with our product specialists to deliver the right solutions to the right clients at the right time,” he says.  

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