Institutional Investor: Bursa chief says Malaysian markets flourishing

Institutional Investor, March 2010

The chief executive officer of Malaysia’s stock exchange explains why he believes Malaysia’s markets are flourishing

 Many countries’ stock markets enjoyed a flurry of capital raising in 2009, but few saw quite such a dramatic revival as Malaysia. The country hosted the largest initial public offering in the region last year – the RM11.2 billion listing of Maxis, the telecommunications operator – and also hosted the biggest rights issue in its history, a RM6.02 billion raising for Malayan Banking (Maybank) in April. Other jumbo rights issues in the course of the year came from Axiata Group (formerly Telekom Malaysia) with a RM5.25 billion issue, then RM5.2 billion from shipping group MISC and RM2.67 billion from Malaysian Airline System.

The overall number of IPOs was down – just 14 for the year – but the volume of these deals stood out. Issues like these, says Dato’ Yusli Mohamed Yusoff, chief executive officer of Bursa Malaysia, “showed that our market was ready and liquid enough to absorb huge fund-raising exercises.” They were more important than they first appear because they had what Yusli calls “a knock-on effect on the market. Maxis added approximately RM37.5 billion into Malaysia’s market capitalization.”

From Yusli’s perspective, as head of the national stock exchange, this was most welcome after a protracted difficult period. “The financial crisis had a wide reaching impact on almost every market in the world,” Yusli says, and Malaysia was not spared. Like other markets, it fell before rising in 2009, with the KLCI benchmark starting the year at 876 points and dropped to 838 by March 2009 before finishing at 1,272, a 45% gain for the year.

Yusli says Bursa used the difficult period “for capacity building for when the market recovery occurs. Our focus was on enhancing infrastructure and our efforts to enhance liquidity in the market.”

Among other things, Malaysia implemented a new fund raising framework, which included a merger of the country’s main and second boards into a single market, and the introduction of a new market, ACE, a revamped version of the previous MESDAQ market for young and technologically-focused companies. Bursa also adopted the FTSE methodology for indices – the KLCI is now, strictly speaking, the FTSE Bursa Malaysia KLCI – and has included new criteria on free float and liquidity in its methodology. “We believe this will spur listed companies to treat both these criteria as critical elements for a vibrant market.”

Also last year, direct market access (DMA) was expanded from the derivatives market to equities, “to increase accessibility and trading efficiency.” The DMA method is accounting for a growing proportion of derivative trading – although still a minority – and Bursa hopes the system will attract a new segment of equity traders.

Other efforts to improve liquidity have included easing a requirement for 30% of stock in local companies to be held by Bumiputera, or ethnic Malays – a move with major social and political implications besides. Also, government-linked companies – including many of the country’s biggest corporate names – are being encouraged to slim their non-core holdings in stocks. Minimum bid sizes have been introduced, an OTC model has been set up for stock borrowing and lending, and market making guidelines have been launched for structured warrants and exchange traded funds (ETFs). All these measures, says Yusli, “bode well to create more liquidity and free float in the market.”

It remains to be seen, though, whether the jumbo issues that characterised 2010 will be repeated in 2009. The needs that drove them were very specific: capital needs for companies emerging from the financial crisis; the unusually high risk premium for debt securities; the need for companies to boost balance sheets and, in the case of banks, new regulatory requirements for them to do so; and, in the best circumstances, for business expansion. “In the second half of 2009, more companies were seen to be moving into the equity market for fund raising as there were clearer signs of confidence in the market from the economic crisis,” Yusli says. But 2010 has been marked by doubt about global recovery, and the fact that many of the companies that needed to bolster funds have already done so.

One more worrying sign is the level of foreign investor participation in Malaysia’s stock markets. In 2008, foreigners held 42% of the market; in 2009, 27%, and it remains around that level today. “Foreign participation is dependent on how our market is perceived based on a variety of socio-political and economic factors, compared with other emerging markets in this region,” Yusli says. He pins the outflow of foreign funds to the 2008 general election results, in which the grip on power of Malaysia’s ruling Barisan Nasional coalition, led by the UMNO party, looked weaker than at any time in its history. Malaysia has the prospect of political change for the first time and investors don’t like it; they have also not enjoyed the tension around opposition leader Anwar Ibrahim’s trial and the sense of growing racial unrest in the country.

The global financial crisis was also part of the reason for the outflow as foreign investors sought to reduce exposure to emerging markets – oddly so in some ways, since emerging market economies have vastly outperformed those in the west.

That’s a challenge that will need to be redressed for the long-term health of the market. In the meantime, Bursa has focused on product development. Malaysia offers a sophisticated range of product, from ETFs to real estate investment trusts (REITS), structured warrants to listed sukuk (the Islamic equivalent of a bond – Malaysia has the most vibrant domestic sukuk market in the world). “The focus,” says Yusli, “will be on creating awareness and promoting the existing product range whilst facilitating the listing of a wider range of structured products, primarily in the derivatives markets.”

The listing of sukuk has been encouraging: between August and December 2009 12 sukuk were listed, worth US$17.6 billion. This figure, Yusli says, leads the world for sukuk programme listings. The progress has continued in 2010, with Sime Darby’s RM4.5 billion sukuk programme listing; Yusli wants to see government-linked companies list their new and outstanding sukuk on the exchange this year too. The rationale for doing so is that it improves transparency and governance, and opens up sukuk to retail investors; people simply have more confidence in a regulated exchange than they do an over-the-counter market. They know who the regulator is and have confidence that penalties will be levied against non-compliant issuers.

Another new development has been Bursa Suq al-Sila’ (BSAS), a new commodity platform. Launched in mid-2009, it logs about RM500 million of trades per day. It started out as a platform for the trading of crude palm oil, in which Malaysia is a leading producer, but there are hopes to put more commodities on it, and to bring foreign Islamic financial institutions in to get involved. This year Bursa signed a memorandum of understanding with its equivalent body in Bahrain, the Bahrain Financial Exchange, to work out how to collaborate on a common platform for commodity murabahah transactions (an Islamic security). “This is in line with our aim to promote BSAS to the Middle East banks which have a significantly larger market in the commodity murabahah sector,” Yusli explains.

In the year ahead, investors should expect to see more ETFs and REITs listed with exposure to other markets in the region. But perhaps the real priority, as the Securities Commission points out in our accompanying roundtable, is not so much to keep bringing new products, as to make sure that people know the existing ones are already there. More than anything else, awareness will be a watchword for Bursa Malaysia in 2010.