A fellow professional and a close friend asked me today about KLSE's low market velocity. I was stumped at first because I did not know that a stock market has velocity. Velocity of money, I have heard of, but in a stock market?? Maybe its the time difference and distance when the client bangs his head against the wall after buying shares?!!
As an after thought, I think I understood his usage of the term. Its the low volume turnover on a daily basis relative to the market capitalisation. OK, granted that the fundamentals for 2005 have not been overly exciting but there are other Asian bourses which can register decent daily volume relative to their overall market capitalisation even in dull periods. Why not the KLSE??
a) Developed countries favour mutual funds investing rather than personal investing. For example, US investors are generally averse to invest in stocks themselves. Mutual funds are a preferred choice for most. As institutional funds control the market, it will have good volume. Many banks and brokers own funds management unit, and it is good for business that things "move". Malaysia's fund management industry and size is still in its infancy.
b) In more established Asian bourses, like HK and Singapore, their spread of private investors is probably similar to Malaysia. However, private investors in HK and Singapore are more likely to follow research reports and corporate news before buying or selling (especially in Singapore). Of course, there are also private investors in Singapore & HK who will jump in on hearsay and speculate on rumours, but the situation is more aggravated in Malaysia. Followers of market fundamentals will find more reason to do bottom fishing even during flat or sluggish markets. Those who don't, will tend to wait till the next bull rally comes along. The KLSE was flattish the whole of last year, can you blame the private investors for taking the year off!
c) Private investors will only be in the market when activity is bustling and simmering or boiling even. When a market is flat and/or sluggish, you can bet that most private investors in Malaysia will be out. Even bottom fishers are in the minority in Malaysia because bargain hunters after buying the stock may have wait a terribly long time before any upsurge activity can be traced. The KLSE is too much geared towards a "bull market only" participants. Activity kind of slack off considerably without leads.
d) Part of the contributing problem is the inability to short stocks - then people will really read research reports to look for bad eggs!! If stocks don't move up, nobody can or should make money. A proper stock market should allow investors to reward and punish companies according to their performance. It is of little use to "protect" companies against short sellers, just like a parent blinded by love for his "under-developed child". Let the child grow up. If a company do not want to be targeted by short sellers, get your books in order, plan your strategies properly, get decent returns, rid the company of fat, etc...
e) Commission rates still too high. If you compare with HK, the overall commission and additional rates charged per transaction by the KLSE is still high. More activity will go hand in hand with good effective transaction costs.
f) Free float restricted. Particularly from good companies. Good companies on KLSE are a dime a dozen. There is no reason to hold onto 55% or more shares of your company even if it is doing well. A good owner must hold onto the mantra that investors must be rewarded for investing in my company. A good free float should be at least 35%-45% of total shares. The lack of shares will dissuade a lot of institutional investors from putting your stock on the radar. Right now, there are not many stocks on the radar of big fund managers, so is it any wonder then that activity in volume traded is lower when compared to regional markets. If owners of good companies places out more shares deliberately, just by doubling the number of companies on the radar of big funds will bump up volume activity substantially.
So, I guess the extending of T+3 to T+7 or T+10 is part of the Bursa's scheme to encourage market velocity. As explained in my blog before, T+10 or T+7 is good, but they are bull market instruments, i.e. will be only effective when a bull market is present. Still, a good move, but the Bursa should try and get at the root of the problem.
p/s I think there are currently only 20-25 Malaysian companies on the radar of big funds, and that is out of over 1,000 listed firms.