Wednesday, October 26, 2005

Rebuttle To 'King Of Emerging Markets' On Liquidity

The KLCI traded sideways for the past few weeks. One after another, foreign research units have downgraded Malaysian equities in preference for other bourses (e.g. Merrill Lynch, UBS and CLSA). Mark Mobius is the closest thing "emerging markets" will get that resembles Donald Trump. The traveling emerging markets' hero could easily pass as a "baddie" in a James Bond movie. Yet, what he says is followed closely by the international media... cos ... there is no one who champions the emerging markets quite like Mobius. The savvy self-promoter does very well for himself and his company (Templeton Emerging Funds Inc) - the firm probably lets him have a high profile as that would bring in the business, no doubt.

The Edge did an interview with Mobius (Oct 17, 2005 issue) and he highlighted a few interesting factors to explain why foreign funds are shying away from Malaysian stocks.

MM: " lack of liquidity ... need to grow the market... need to privatise the pension funds.."

Dali: There is only so much Malaysian markets can grow. Do you know how small we are. Take any ONE of the Top 10 market cap stocks in the US, any ONE is bigger than the entire listed market cap of the 1,000 odd listed companies. We are small, our base is small. Any credible foreign fund would probably only look at the top 25 market capitalised stocks as they are sufficiently big enough and liquid enough to move in and out. You CANNOT just ask us to grow our markets. To even have 20-30 stocks that are big enough to satisfy international fund managers' requirements is a task in itself. So, don't just open your mouth and say we need to grow and need more stocks with liquidity WHEN you should know better than others that "big companies" are hard to come by or be nurtured on a base population of 24 million.

On privatising our pension funds, I think we need to protect more the retirement funds of Malaysians, rather than provide additional revenue for foreign fund managers (who may or may not improve on overall long term returns). I am sure Mobius would like us to privatise more of our pension funds...

On the liquidity issue, well again that boils down to the size of a normal big company in Malaysia. It takes time to grow an international company. You do not expect the MISCs and Petronas or Maybanks to just give up more shares just to satisfy the foreign funds investing requirements??!! Having said that, Mobius do have a point here, Government linked corporations and other top 50 market cap firms need to consider allowing more shares in the hands of the public in order to provide sufficient liquidity. There is not much point in holding over 50% of shares to maintain control when 40% will do. In fact recent studies have indicated that large companies (especially government linked firms) have outperformed the market over an extended period AFTER they have reduced their shareholding (creating more free float in the markets). If big boys cannot get in and out easily, they won't be interested.

Liquidity is not so simple. Do we just want to boost liquidity so that more foreign funds can invest in certain stocks? If that's the case - pray tell, what is the rationale for doing that, what benefit can we gain from getting foreign funds to invest. Do they somehow result in higher valuations (possibly), but so too will the fall be greater (when they pull out)... We want foreign direct investments NOT share traders, FDIs will result in employment and long term committment to the local economy. There is no difference in having Templeton as a holder of Malaysian stocks than say EPF. Unless we are saying that there are INSUFFICIENT local funds buying/holding Malaysian shares - which I don't believe to be the case. EPF could easily lift the active investing level in local shares substantially without hurting the overall risk portfolio.

Sure, foreign fund managers will belittle and crticise the short comings of investing in the Malaysian markets. Some are constructive but some should be IGNORED especially when the main beneficiaries of their talk is foreign funds themselves. We need to appreciate things that are beneficial to Malaysia like FDIs, and capital/bond raising for Malaysian corporates and the government.

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