Malaysia: testing Bursa’s claims of resilience

Euromoney, December 2008

Malaysia has been on the road recently attempting to bolster interests in its markets from overseas. The message: that Malaysia has been fairly resilient to world market chaos; and that it’s well positioned for the bounce when it comes.

On first glance, it is drawing rather a long bow to present Malaysia as having held up well as others have fallen. It is true to say that in 2008, Malaysia has performed better than every other significant Asian stock market bar Pakistan. But the Kuala Lumpur Composite index was still down 38.1% in the year to November 11, worse than the Dow Jones Industrial Average or the FTSE 100.

Nevertheless, in an odd way there’s actually something in it. “Certainly our market is down, but it came down earlier because of the politics,” says Dato’ Yusli Mohamed Yusoff, CEO of Bursa Malaysia, the stock exchange. “If you track our market performance since the election in early March… there is probably less volatility.” He’s referring to the improving performance of the Anwar Ibrahim-led opposition in Malaysia, which has created the real prospect of a future change of party in Malaysia for pretty much the first time since its formation in 1963. That potential instability did not go down well in the markets. And so Yusli’s contention is true: since March 10, the index is down 23%, which in world terms is not so bad. For example, to the south in Singapore, the Straits Times index is down 35% over the same period.

Not that it’s likely to make them feel any better, it’s also true to say that foreigners have been deserting the market for much longer than the credit crunch. Foreign ownership stood at 27.5% in April 2007 and has been falling steadily ever since, reaching 23.1% in September 2008. That’s almost historically low. “After the Asian crisis foreign ownership was about 20%,” Yusli says. “Now it’s in the low 20s: those foreign investors who wanted to exit, most of them already have. My personal view is we are probably close to the bottom if not at the bottom already in terms of foreign ownership.”

Presenting Malaysia as troubled by different problems to the rest of the world, and therefore a better prospect today, is an interesting premise. It’s true that Malaysia had relatively little exposure to sub-prime, but most of Asia can say that too. It’s also true to say that Malaysia’s yield, at 6.5% on October 31, is one of the highest in the region (although Thailand and Taiwan are higher), which is potentially attractive. But the fact that much of its fall came for political rather than sub-prime reasons doesn’t necessarily make it a better bet for the future. “There’s no doubting there was some concern about the politics in Malaysia, simply because it was something investors in Malaysia have not seen before,” Yusli says. “For the first time ever there was this new variable and they didn’t know how to handle it. But now I think things are becoming a lot more clear.” Consequently, “I think investors will focus on the fundamentals, and that’s still OK.”

One interesting question is whether the strength of Islamic finance in Malaysia provides it with some resilience. Fourteen of Malaysia’s 36 banks are Islamic, and as such were prohibited for getting involved in a lot of the securities that triggered sub-prime in the first place. It has been argued that Islamic finance will never have a better opportunity to prove its worth than in the midst of this decay in conventional banking; has it helped Malaysia? “Certainly Islamic securities have a higher level of transparency, as well as asset backing, than you would find in some conventional products,” Yusli says. “I would say that they should be less volatile; there should be more support for them given the real assets behind the securities.”