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Malaysia On The Verge of Take-Off
It has been an eventful week for the Malaysian capital market and banking industry with the Government announcing a slew of measures aimed at strengthening the economy and adding depth to the capital markets. The transformation of the financial landscape was signalled by Prime Minister Datuk Seri Abdullah Ahmad Badawi when he announced at the Invest Malaysia 2005 conference the names of the foreign brokers. The following day, Bank Negara also unveiled a series of measures designed to overhaul the exchange market. On Thursday, at the last day of the conference, Second Finance Minister Tan Sri Nor Mohamed Yakcop continued where the Prime Minister left off on the five stockbroking companies:
"Overall, we are pleased with the response to our invitation to establish foreign owned stockbroking and fund management operations in Malaysia.
I would like to extend my congratulations to those who were selected, and thank all who applied. We have very high expectations of those selected and we look forward to the international firms meeting their proposed commitments in terms of intensifying their efforts to promote the Malaysian market and building substantial operations.
We expect those selected to contribute to the Malaysian economy through:
# First, enhancing liquidity and vibrancy of Malaysian capital markets through a higher proportion of global order-flow and deal-flow;
# Second, bringing FDI, particularly in terms of injecting international skill sets and best practices, to the industry, and thus contributing towards the development of local human capital;
# Third, promoting market development by addressing segments of the market that are currently not well covered;
# Fourth, promoting the export of Malaysian capital market products and services, through their distribution channels with investors and issuers in other parts of the world;
# Fifth, establishing regional operations such as for the Islamic Capital Market (ICM), outsourcing and project finance in Malaysia.
Progressive deregulation to enhance domestic competitiveness
Enhancing the role of the Malaysian capital market in support of broader national economic policies also requires a core of strong full-service capital market intermediaries to ensure a vibrant and competitive capital market;
Prior to 2001, the domestic stock broking industry was highly fragmented, with firms highly reliant on stock broking commissions from one revenue source, having weak balance sheets and being unable to exploit economies of scale.
The Capital Market Masterplan (CMP) outlines initiatives for progressive deregulation to provide the domestic stock broking industry the flexibility to evolve differentiated business models and to create a conducive environment for the generation of higher levels of efficiency and innovation.
These initiatives are aimed at preparing domestic players to compete in an internationally competitive market place. The Government is also committed to managing deregulation 'in a manner such that there is no greater economic adjustment cost than necessary to build efficiency and diversity in the market with minimal delay.â€
The consolidation of domestic stockbrokers has led to a reduction in numbers from 66 to 33. Domestic stockbrokers are now stronger and have started to diversify their product lines, broaden their revenue base and exploit economies of scale.
As part of the current phase of capital market development, specific initiatives were announced this week for the creation of investment banks while the capabilities of universal brokers and other stockbrokers, which had complied with consolidation policy, were further expanded.
These regulatory measures will further contribute towards promoting strong full-service domestic capital market intermediaries through encouraging constructive competition and strengthening prudential and governance practices.
Enhancing the value proposition of the market – focus on quality
Ultimately, it is the value proposition that a capital market offers to its customers – namely investors and issuers – that will ensure its long-term sustained success. In this regard, Malaysia is moving to a value-added phase, having substantially strengthened market foundations through enhancements to the infrastructure and regulatory framework.
The current value-added development agenda focuses on meeting customer needs. It is a challenge that falls squarely on the private sector - and is consistent with the Government`s plan for fiscal consolidation and for the shifting of the engine of growth to the private sector.
Malaysia`s formula to achieve this objective is to strengthen the position of its capital market as a premier market through offering quality products. The Malaysian Government believes that quality is the key to sustaining the long-term growth of the Malaysian capital market.
At the heart of efforts to enhance the quality of its capital market are Malaysia`s public listed companies or PLCs, the main issuers of capital market products. To enhance the quality of the Malaysian capital market and its position as a premier market, Malaysian PLCs have started inculcating the qualities of good governance, sound management, strong leadership and demonstrate a commitment to shareholder value creation.
In this regard, Khazanah is leading the Government`s efforts to transform GLC performance and increase their levels of shareholder value creation; this would translate into stronger economic growth, higher accumulation of wealth and a more efficient and vibrant capital market.
I am confident that the private sector will follow the Government`s lead and implement similar initiatives to strengthen quality in terms of achieving operational excellence, ensuring visionary leadership, building their brand and increasing shareholder value.
We have excellent Malaysian PLCs which are already local champions, and they must be pushed to the next stage and become regional champions. Malaysian companies are well placed to capitalise on the opportunities for rapid growth in the region. At the same time, many other Malaysian PLCs are now ready to strive towards greater value creation and generate market level yields.
The time is now right for leading Malaysian PLCs to take up the challenge of bringing their companies to the next level and to pursue more vigorously high-growth opportunities.
Apart from these qualities, our PLCs are now developing greater sensitivity to the needs of investors. For example, CEOs of PLCs are beginning to take personal responsibility for investor relations and for maintaining openness in dealing with investors when delivering both good news as well as bad.
Scrutiny by shareholders, especially from well-informed and knowledgeable lead steers like yourselves, would provide constructive feedback that CEOs would be well advised to take note of. By the same token, PLCs should put in greater effort to ensure greater research coverage of their companies. Recently, the Bursa CMDF research scheme was launched to ensure greater research coverage of small and mid-cap stocks and I would encourage PLCs to take advantage of this scheme.
Overall, our objective is to have more Malaysian PLCs on the radar screens of international investors and this is a situation that Malaysian CEOs should urgently address by being strongly committed to investor relations and practising high standards of voluntary value-added disclosure. Majority shareholders could also consider selling down equity to enhance free float in the secondary market and thereby enhancing overall market liquidity.
Further efforts to strengthen the integrity of the capital market
A quality capital market also requires high levels of integrity. The standards of the Malaysian capital market for governance, transparency and disclosure are now internationally acknowledged. The SC will focus its resources on surveillance and enforcement. To enhance the effectiveness of the SC as an enforcement agency, the government has established a dedicated court for capital market offences. The SC has also broadened its range and scope of enforcement actions to expand the use of civil and administrative actions. It is now targeting greater accountability among professionals and advisers. This is being complemented by greater emphasis on pro-active corporate surveillance.
Concluding remarks – Malaysia on verge of take-off
In conclusion, Malaysia as an investment proposition is compelling. The Malaysian capital market will not only provide investment products but will play a leading role in accelerating the growth of the services sector and, in the process, assisting capital formation and contributing substantially to the nation`s growth.
Let me reiterate the confluence of favourable factors supporting the Malaysian investment proposition:
# First, there are many outstanding macroeconomic positives supporting sustainable strong growth, Malaysia is a leading trading nation with continued trade surpluses. In addition to trade led growth, Malaysia`s young and culturally diverse population provides both a strong base for consumption led growth and a rich pool of human capital talent. Malaysia continues to enjoy low inflation and an accommodative monetary policy. Everything Is In place. It is a question of unlocking and leveraging on Malaysia`s latent potential.
# Second, Malaysia`s unique position to capitalise on regional growth. Malaysia is located in the fastest growing region in the world and is best placed to benefit from opportunities in China, India and Asean due to its natural geographical, cultural and historical connections.
# Third, Malaysia has a strong track record to deliver on what it promises. We are continuing to do what we have done so successfully over the past two decades. Government policy will continue to be prudent and pragmatic. For example, our skills-development programmes will be continually honed to stay in tune with the demands of the times. However, at the same time, we are at full employment and thus we will keep the door open to foreign workers, both skilled and unskilled, to help fill the gaps in the labour market that Malaysians currently cannot fill.
# Fourth, the Malaysian Government is committed to a reform agenda based on fundamentals to accelerate the growth of the Malaysian economy and capital market. It is a simple and fundamental based agenda that targets increasing the level of participation, enhancing the quality of services and products and strengthening the delivery of value to shareholders.
The capital market is on the verge of take off spurred by:
# Critical mass building in many segments of the capital market. The size of Malaysian capital market was RM1.1trill comprising market capitalisation of RM722bil and debt securities of RM379bil as the end-2004. The size of the ICM bond market is now approaching RM100bil. Wealth is accumulating in many segments of the investment industry with assets of the Employees Provident Fund above RM240bil, banking deposits held by individuals at RM265.7bil and the net asset value (NAV) of unit trust funds at RM87.4bil. With critical mass, the compounding effects can be sizeable.
# Recent developments adding to the growth momentum. Over the past two years, unit trust NAV has been growing by between 25% and 30%. A strong market performance translates into higher rates of return and has a snowballing effect on industry growth rates, which, in turn attracts greater fund inflows.
In addition, the entry of foreign stockbrokers, fund managers and issuers such as multilateral organisations will expand the number and type of participants in the Malaysian capital market, with positive effects on growth rates. There has also been a pick-up in the pace of product innovation – recent examples being REITs, Asset-Backed Securities (ABS), multilateral RM-denominated bonds, structured notes and the global sukuk – to meet the needs of customers and this will again attract greater participation in the Malaysian capital market.
I believe that the confluence of favourable factors will translate into many opportunities for investors like you. Therefore, please go long on Malaysia.
Kuala Lumpur 25/03/2005
