Amidst a mixed earnings performance around the world in 2015, Malaysia’s capital market posted modest growth over the course of the year. The sector grew by 2.1% in 2015, according to data compiled by the Securities Commission Malaysia (SCM), the capital market sector regulator, to reach RM2.82trn ($698bn) by the end of the year, which was 2.5 times the size of the economy. Bursa Malaysia (BM), the nation’s stock exchange, accounted for roughly 60% of this total, with a year-end market capitalization of RM1.7trn ($420.8bn), while outstanding debt issuances made up the remaining RM1.12trn ($277.2bn). This follows on from half a decade of steady growth in the total value of Malaysia’s capital market. In recent years the country has emerged as a substantial player in a number of areas, including fund management, sharia-compliant finance and debt issuance.
Indeed, in 2015 Malaysia was home to the third-largest local currency bond market in Asia, after Japan and South Korea. “The capital market’s ability to remain resilient while maintaining public trust and investor confidence in a challenging global climate attests to the continuous efforts that have been put into strengthening its regulatory and institutional foundations,” Ranjit Ajit Singh, executive chairman of the SCM, told local media in March 2016. “This includes well-developed intermediation capabilities and a large domestic institutional investor base, enabling efficient capital mobilisation and providing a buffer against external volatility.”
That said, participants in Malaysia’s capital markets currently face a variety of challenges. Heightened market volatility – linked to the weak price of oil, ringgit devaluation and political tensions, among other external factors – resulted in widespread caution among the investor base in 2015. As of mid-April 2016, these issues had yet to be resolved. Like most other commodity exporters around the world, Malaysia’s domestic economy has been impacted by China’s recent rebalancing and the subsequent correction in global commodity prices. Weak global trade and ongoing global liquidity flow volatility, both of which are related to anticipated interest rate hikes by the US Federal Reserve, are expected to continued to hamper Malaysian capital market growth for at least the short-term future. “It has been a challenging period here recently,” said Pong Teng Siew, the head of research at Inter-Pacific Securities, a Kuala Lumpur-based stockbroking company. “This was not entirely unexpected. Stock markets are cyclical, after all, and we have a very good run from 2011 through 2013. The question in late 2015 was, when will we begin to see growth again?”
Indicators from the first few months of 2016 suggest that the market may perform far better over the course of the coming year than in the previous period. Foreign investors – who left BM en masse in 2015 – returned the country in early 2016. “Our efforts since the middle of last year have been on continued engagement with foreign investors to highlight Malaysia’s strong economic fundamentals, and as an advanced emerging economy, Malaysia is well supported by a stable and diverse capital market” Azhar Zabidi, CEO of Capital Markets Malaysia (CMM), the promotional arm of the SCM, told OBG. “Since late December 2015, the market has improved and witnessed a marked increase in foreign buying.”
Malaysia’s capital market dates back to the early decades of the 20th century. In the 1910s and 1920s informal share trading was common among the local business population. The Singapore Stockbrokers’ Association became the first formal securities business organisation in the country when it was established in 1930. Seven years later the entity expanded its operations and was subsequently rebranded the Malayan Stockbrokers’ Association. In the wake of Malaysia (then known as Malaya) achieving independence, in 1957, a raft of new formal financial entities were set up in the country. As part of this rush of activity, the Malayan Stock Exchange, the precursor to the BM, was established in 1960, with trading rooms in Singapore and Kuala Lumpur.
The name of the exchange was changed to the Malaysian Stock Exchange in 1964, along with the nation’s changed name. A year later Singapore seceded from Malaysia, and the exchange was once again renamed and reorganised. The new entity, known as the Stock Exchange of Malaysia and Singapore, served as the capital market for both countries, on the basis that their currencies were interchangeable. When currency interchangeability ended in 1973, however, the exchange was split into two, namely the Stock Exchange of Singapore and the Kuala Lumpur Stock Exchange (KLSE). In the early 2000s the KLSE underwent a period of demutualisation, whereby the bourse moved from a mutual, self-regulated governance structure to a joint-stock company structure. When this transition was completed in 2004, the exchange, which was widely seen to be more competitive as a destination for foreign investors, in particular, was rebranded and became BM. A year later the bourse itself became a publicly listed company. In October 2007 BM received certification as both an ISO 9001:2000 Quality Management System and an ISO 14001:2004 Environment Management System.
More recently, a number of key joint ventures and updates have impacted how the exchange operates. For instance, in September 2009, BM entered into a strategic partnership with the Chicago Mercantile Exchange (CME), in order to further develop the Malaysian bourse’s derivatives offerings. The deal involved the CME taking a 25% stake in BM Derivatives (BMD), a BM subsidiary that is charged with operating the futures and options exchange. Among other products, the BMD is home to one of the most liquid crude palm oil futures markets in the world.
In 2012, meanwhile, BM signed a deal with the US-based exchange technology provider NASDAQ OMX to upgrade the exchange’s trading engine. The new platform, which went live in December 2013, handles equities, fixed-income instruments, exchange-traded funds and issuer warrants.
Regulation & Oversight
Malaysia’s capital market is regulated under the Securities Industry (Central Depository) Act of 1991, the Securities Commission Malaysia Act of 1993 and the Capital Markets and Services Act of 2007 and subsequent amendments to each piece of legislation. Under the 1993 act, the SCM was established and named the capital market sector regulator. The commission has various functions, including overseeing operations at the BM, authorising the issuance of securities, regulating mergers and takeovers, auditing, managing systemic risk, and setting, implementing and monitoring standards and qualifications for both the securities and derivatives markets. As an active member of the Spain-based International Organisation of Securities Commissions (IOSC), the SCM works to maintain international standards and best practices across Malaysia’s capital market. “The securities commission is a robust authority,” Pong Teng Siew told OBG. “They have done everything in their power to support the market during the recent challenging period.”
Additional entities that are involved in regulating capital markets in Malaysia include the country’s central bank, Bank Negara, and the Ministry of Finance, among others. In early 2016 the IOSC announced that it would open an office in Kuala Lumpur – its first outside Spain – in order to provide better services to the Asia-Pacific market. The IOSC’s membership consists of regulators that govern more than 95% of global capital markets. “The selection of Malaysia clearly demonstrates international recognition of Malaysia’s efforts toward building a high-quality and well-regulated capital market and the role the country has in the region,” Ranjit Ajit Singh, SCM’s executive chairman, told local media in late February 2016.
The SCM has made a number of changes to the sector’s regulatory framework in recent years. In 2015, the commission introduced new amendments to both the Capital Market and Services Act and the Securities Commission Act. The update to the former law laid the regulatory groundwork for the introduction of alternative trading platforms, including equity crowdfunding platforms, while ensuring that the SCM is able to ensure the stability of these activities and protect investors from unreasonable risk. Updates to the Securities Commission Act extended the regulatory powers of the commission’s audit oversight board, shored up the audit board’s ability to share information and assist other Malaysians authorities, and boosted the SCM’s examination powers, among other changes. These latter upgrades were carried out primarily in an effort to ensure that Malaysia’s capital market regulatory framework was in line with IOSC principles.
In 2015 the SCM also rolled out the so-called “lodge and launch” framework initiative, which lays out new rules for the listing of wholesale products on the exchange in an effort to streamline the process. Prior to the introduction of this legislation, it took the SCM 14-21 days on average to approve most wholesale products, including general funds, structured products, bonds, sukuk (Islamic bonds), and asset-backed securities, among others. Under the new law the commission hopes to reduce this time-to-market considerably. Finally, in July 2015 the commission introduced measures aimed at boosting the competitiveness of the fund management segment, by allowing the establishment of boutique fund management companies in Malaysia. Under the previous law, fund management firms were required to maintain paid-up capital of RM2m ($495,070), but under the new law, a boutique firm must have paid-up capital of just RM500,000 ($123,768).
The fund management industry is one of the fastest-growing components of the country’s capital market. From 2010 through to mid-2015, total assets under management (AUM) in Malaysia jumped from RM337bn ($83.4bn) to RM662bn ($163.9bn).
A handful of short- and medium-term plans are currently in place in Malaysia’s capital market sector. The industry’s first comprehensive planning document was the Capital Market Masterplan (CMP), which ran from 2001 to 2010. The strategy was designed, first, to overcome the lingering effects of the 1998 Asian financial crisis (which continued to impact the region’s capital markets through to the mid-2000s), to meet the needs of the Malaysia’s rapidly expanding economy and to boost its competitiveness in regards to attracting international business and new investment. To achieve these objectives the CMP laid out a series of regulatory and organisational reforms, effectively focusing on ensuring that the foundation of the country’s capital market were up to date, and in line with international standards.
By almost all measures, the impact of the CMP was far-reaching. From 2000 through 2010 Malaysia’s capital market expanded rapidly. According to SCM data, during this decade the country’s equity market expanded by almost 190%, from RM444bn ($109.9bn) to RM1.28trn ($316.8bn), and the bond market grew almost 180%, from RM273bn ($67.6bn) to RM759bn ($187.9bn). Meanwhile, AUM and the derivatives market expanded by roughly a factor of six, the former from RM55bn ($13.6bn) to RM377bn ($93.3bn), and the latter from RM7bn ($1.7bn) to RM43bn ($10.6bn), according to SCM data. Finally, Malaysia’s Islamic capital market expanded by almost 260% during this period, from RM294bn ($72.8bn) in 2000 to RM1.05trn ($259.9bn) at the end of 2010.
In April 2011 the SCM launched the CMP 2, which covers the period 2011-20, and builds on the previous CMP. Under the new plan, which is currently under way, the SCM has identified a handful of new challenges that have come into play as a result of the rapid growth of the market under the original strategy. For instance, since the capital market in total – including both the equities and bond markets – reached nearly RM3trn ($742.6bn) in value at the end of 2015, there are opportunities to benefit from economies of scale, both in terms of market consolidation and streamlining efforts. Given that Malaysia has become a regional leader in a handful of core segments – including Islamic products and asset management – the CMP2 prioritises boosting connectivity with other leading capital markets around the world, in an effort to help Malaysian companies and investors take advantage of new opportunities. Broadly, then, under the current strategy the SCM aims to turn Malaysia into a global centre for securities trading, international investment and raising capital.
“Historically, several geographies have gained popularity for a period of time and become the focus for international investors. Examples would include the Eastern European emerging markets in the late 1990s, and Brazil, Russia, India and China in recent times,” added CMM’s Zabidi. “Over the last year, ASEAN has come to be recognised as a key growth region, with investors seeking exposure. This augurs well for the Malaysian capital market which is one of the more mature and diverse in the region.”
More directly, in September 2015 Malaysia’s government announced that it was in the process of injecting RM20bn ($5bn) into the BM, in an effort to shore up the equities market, which saw an outflow of foreign capital in the year leading up to the announcement. Like most other exchanges in South-east Asia and, indeed, around the world, in 2014-15 the BM’s performance was mixed, with investor confidence flagging due to volatile global energy markets, falling demand for commodities and other primary products in China (a major Malaysian trade partner) and the strong US dollar, which has put considerable pressure on a number of currencies in the region, including the ringgit. As of mid-2015 the ringgit was at near 18-year lows, making it the worst-performing currency in Asia for the year. Additionally, the country’s capital market – and, indeed, the entire Malaysian economy – has been negatively impacted by financial issues surrounding 1Malaysia Development, a state-owned strategic development company that acquired some RM42bn ($10.4bn) in debt over a period of only five years, and is currently the focus of a number of corruption investigations. The impact of these risks was a net outflow of around RM23bn ($5.7bn) from Malaysia’s capital market from the beginning of 2014 through late 2015. The bulk of this amount – totalling approximately RM16bn ($4bn) – departed the country in the first eight months of 2015.
To address the flight of capital from Malaysia, in August 2015 the government announced the formation of a Special Economic Committee (JKE), with a mandate to ensure the stability of the nation’s economy, shore up the ringgit and boost economic growth across the capital market, among other targets. The capital market finance injection was one of the JKE’s first initiatives. Under this programme the government has reactivated ValueCap, a state investment firm initially set up in 2002 to buy undervalued equities. Prior to the recent capital injection the company had seen declining investment by the state. “There are signs of moderation in global economic growth in 2015 and 2016,” Malaysia’s prime minister, Najib Razak, told local media at the JKE announcement. “To protect the real economy from these risks and to maintain the growth momentum as targeted, the government has decided to introduce pro-active measures.” The RM20bn ($5bn) injection, launched in September 2015, was begun immediately, and is expected to continue through to 2016.
Additionally, Khazana, Malaysia’s primary sovereign wealth fund, announced RM6.8bn ($1.7bn) worth of new investment across the exchange in September 2015. The JKE also played a central role in recalibrating Malaysia’s federal budget in January 2016, in an effort to ensure the nation’s long-term stability and encourage economic growth.
By all accounts this effort has been broadly successful. In the last three months of 2015 and the first quarter of 2016 the BM’s performance improved considerably, with foreign investors once again moving into the market. Indeed, in the first three months of 2016, Malaysia saw the fastest growth of foreign inflows in South-east Asia, with some RM4.4bn ($1.1bn) coming into BM equities in total, according to stock exchange data compiled by MIDF Amanah Investment Bank, a Kuala Lumpur-based firm. The next-largest regional markets in terms of capital inflows in the same period were Indonesia, with around $300m, Thailand, at around $200m, and the Philippines, at less than $100m.
Demand for Malaysian stocks has been driven largely by the market’s relative stability as compared to many of its regional peers. “Sometimes, too much excitement can cause a panic attack, especially with volatile markets,” Tan Ming Han, a senior investment manager in the Malaysian offices of the European asset management firm Amundi, told media in March 2016. “Boring is sometimes beautiful.” Indeed, demand for Malaysian equities has been robust. As of mid-April 2016 the headline FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBMKLCI), which tracks the 30 top-listed companies on the exchange by market capitalisation, was at 1728 at the end of 2015, up 2.1% from 1692.5, and some 12.8% from 1532.14 in late August of the same year.
The BM consists of two equities markets, namely the main market, with 812 listed companies as of April 2016, and the ACE market, a small- and medium-sized enterprise facility, with 109 listed firms in the same period. In 2015 the exchange saw growth of 2.6% to reach a total market capitalisation of RM1.7trn ($420.8bn). The headline FBMKLCI ended 2015 down approximately 4%, after posting a decline of some 5.7% in 2014.
However, these drops follow on from an extended period of dramatic growth. Indeed, in the years running up to the 2007-08 global financial downturn, the index posted double-digit growth on a regular basis. In 2006 the FBMKLCI – then known as simply the KCLI – posted year-on-year growth of 21.8%. In 2007, as global markets soared, the index was up 31.8%. This was followed by an almost 40% decline in 2008. However, this drop was overcome in 2009, when the newly rebranded FBMKLCI saw growth of 45.2%, according to the FTSE Russell global index. The FBMKLCI posted growth in the low double digits in 2010, 2012 and 2013, before entering the current period of volatility.
As of the end of March 2016 the largest component firm on the FBMKLCI and the largest listed firm on the BM as a whole, was Public Bank, which, with a market capitalisation of RM58.4bn ($14.5bn), is one of the largest financial institutions in South-east Asia (see Banking chapter). The institution made up 11.62% of the index’s total market capitalisation. The second-largest FBMKLCI component was Tenaga Nasional, the largest electricity company in Southeast Asia, with a market capitalisation of RM49.15bn ($12.2bn), representing around 9.8% of the total index market capitalisation. In third place, meanwhile, with a market cap of RM48.43bn ($12bn) at end-March 2016, equal to 9.6% of the total index, was Malayan Banking, which is branded in Malaysia and regionally as Maybank. In fourth and fifth place, meanwhile, were the telecommunications company Axiata Group, with a market capitalisation of RM26.5bn ($6.6bn) – each equal to 5.3% of the value of the total FBMKLCI – and CIMB Group Holdings, a financial conglomerate, with an RM26.47bn ($6.6bn) market cap, or around 5.3% of the total. Rounding out the top 10 largest firms by market capitalisation were the industrial giant Sime Darby, the resort operator Genting, Petronas Chemicals, the mobile telecoms provider Digi.com, and the health care equipment supplier IHH Healthcare. In total, these 10 firms accounted for more than 62% of the value of the FBMKLCI, and around 18% of the value of the total BM equities market, according to exchange data compiled by FTSE Russell.
In line with the recent market volatility, listings on the BM slowed somewhat in 2015. Over the course of the year the exchange attracted 11 initial public offerings (IPOs), which were collectively worth RM4.35bn ($1.1bn), accounting for 38% of the value of all IPOs in Singapore, Indonesia and Malaysia, according to data from Duff and Phelps, a US-based corporate advisory and valuations firm. The largest Malaysian IPO in 2015 was Malakoff Corporation’s RM2.74bn ($678.2m) listing in May. Malakoff, a power producer, is a major supplier to Tenaga Nasional and Malaysia’s national grid. Both the second and third largest listings on the BM in 2015 were construction companies – Sunway Construction Group raised $125m, while the Ikhmas Jaya Group raised $18.84m.
In 2014 the BM attracted 13 IPOs, which together raised some $1.01bn, considerably higher than the following year. In 2013, meanwhile, the exchange saw 17 new listings, which collectively raised $2.66bn. As compared to other exchanges in the region, however, the BM has seen less of a decline in terms of new listings over the past three years. The Singapore market, for instance, raised just $450.7m in 13 IPOs in total in 2015, down from $2.27bn in 23 listings in 2014 and $5.47bn in 26 listings in 2013, for instance. Similarly, the Indonesian market saw 30 new listings in 2013, raising $3.69bn in total, whereas in 2015 these figures had fallen to 13 and $765m, respectively. These data reflect the cautious global investment environment. In 2015 global IPOs declined by more than 26% on the previous year in terms of the value of capital raised. In the first four months of 2016 four IPOs went forward on BM’s main market. Listings by Ranhill Holdings, a power and environment-focused conglomerate, and the Chin Hin Group, a building materials supplier, wrapped up in February 2016, with strong performance from both companies. In March 2016, meanwhile, the convenience store operator Bison Consolidated saw its listing oversubscribed by 6.94 times. Finally, in late March and early April 2016 the Pecca Group, a car upholstery manufacturer, went ahead with an RM67.8m ($16.8m) listing. According to the SCM, additional IPOs are expected over the course of the remainder of 2016, with the potential in particular for new deals from the power and utilities sector (see Energy chapter). “2015 was a very quiet year in terms of IPOs,” Pong Teng Siew, of Inter-Pacific Securities, told OBG. “Given the ongoing pressures, I expect 2016 will be similarly quiet.”
At the end of 2015 Malaysia’s bond market was worth RM1.12trn ($277.2bn), slightly higher than the end-2014 figure of RM1.11trn ($274.8bn). As in the equities market, foreign investors sold off a considerable percentage of their Malaysia bond holdings in mid-2015. According to SCM data, foreign ownership of Malaysia bonds decreased by around 5% over the course of the year, from RM225.9bn ($55.9bn) to RM214.8bn ($53.2bn), at which point foreign bondholders accounted for just over 19% of outstanding bonds. The outflow was a result of the various pressures that caused foreign investors to depart the equities market, plus concerns over the falling value of the ringgit. Robust domestic demand for both corporate and sovereign debt made up for the lacklustre foreign interest. Sukuk issuance declined in 2015, from RM262.8bn ($65.1bn) in 2014 to RM117.7bn ($29.1bn). Yet Malaysia boasts the world’s premier Islamic financial industry, and the capital market plays a major role. Despite the decline in Islamic debt, as of the end of 2015 the nation was home to more than 54% of outstanding global sukuk.
Given the turnaround and subsequent strong market performance in the first quarter of 2016, many local players are broadly optimistic. However, various challenges persist. Though it has recovered a bit recently, the value of the ringgit, which is closely linked to the price of Brent crude, is widely expected to continue to put pressure on foreign investors. “Among the many challenges we face when talking to foreign investors is around the longer-term direction of the ringgit, especially given the continued volatility in oil prices,” CMM’s Zabidi told OBG.
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