Friday, September 27, 2019

What's Ailing The Local Equities Market

So, whats ailing the local bourse. The Dow keeps chugging along and most other markets have been doing relatively well for the longest time. Our local markets have been in the doldrums since we changed government. Is it that we are still on the clean-up stage owing to the many mismanagement at plenty of GLCs? Is our debt burden so insurmountable? Is the property overhang causing a shrinkage in liquidity?

Or has it to do with the Malaysian bonds' future?

Stock market indices provider FTSE Russell’s decision to retain Malaysian bonds on its FTSE World Government Bond Index (WGBI) watch list is negative to the market, AmBank Research says.
“The next review will only be due in March 2020. This is negative to the market as it means the overhanging concern on potential US$8bil (RM33.6bil) foreign outflows from the Malaysian bond market in the event of a downgrade will not immediately go away, ” the research house said on Friday.
“Apart from Malaysian bonds, a downgrade would hurt the ringgit, and in turn, the appetite for Malaysian equities as well, ” it said in a research note.
A downgrade of Malaysia’s bond would have excluded them from the WGBI. Malaysia's bond market is the most foreign-owned in Asia, and the status-quo could weigh on the ringgit on Friday, Reuters reported.
FTSE Russell will provide another update after an interim review in March, which would give the Malaysian central bank time to potentially explore more measures to enhance liquidity, the agency added.


For me, all the cited reasons above do not account for the main reasons why local equities have been shunned.

1) Participation Rate - As a developing economy, it is natural that the markets will see a large participation by private investors vis-a-vis institutional. In bullish markets, retail investors may account for 40-60% of volume traded. Things have been evolving for the past 10 years. Can anyone guess how many broking accounts there are in Malaysia: answer, it is 1-2 million, maybe even more. 

Now, guess how many accounts TRADE AT LEAST ONCE A YEAR ... (you can get the actual figures from Bursa if they let you) ... around 200,000 accounts. So forget about the 2 million, most are dormant or replications. 

Now, guess how many individual accounts trade at least ONCE A MONTH. Its around 60,000 only. Does that ring any alarm bells? How did we get to this sorry state?

2) Lacklustre IPOs - Need I say more. For the past 10 years, you can tabulate all the IPOs and see how they perform. Are there no interesting prospects left? I would argue that overly stringent rules and regulations have been hampering decent companies. Many have opted to go overseas for listings. Some cannot get the valuations they want.

Bursa/SC have to be forward thinking in bringing up good prospects to list on Bursa even though it might have to bend rules a bit. Our regulations are too tight and leave no room to manoeuvre. Then there are are the overly inquisitive on their sources of capital - it is up for debate; there are already rules by Bank Negara to "capture questionable funds", why does this fall under Bursa/SC again?
The reality is, EVEN WITH THE TIGHT REGULATIONS we are coming up with very mediocre IPOs, so the rules are not doing their jobs no matter how you argue.

Why can't you help list IPay88 (want higher valuation, so be it, it is the future), or 99Speedmart, KK Group or PappaRich .... just scan these decent companies: AbbVie Sdn Bhd, Elken Sdn Bhd, arvato Systems Sdn Bhd, Continental Tyre PJ Sdn Bhd, Jakel Trading Sdn Bhd, Matrix Global education Sdn Bhd, Harta Maintenance Sdn Bhd, KDEB Waste Management Sdn Bhd, OFO Tech Sdn Bhd, Swingvy Sdn Bhd, Zenxin Organic Food Sdn Bhd ... Of course, not all of them are quite ready to list, but many are if we are just more "amenable to the requirements".

Our listing rules are so archaic, we still favour old industries with hard assets, proven profits over 3 years, listing around 10-15x earnings ... all these rules are meant for industries 25 years ago, we haven't changed.

There is little proactive engagement with these private companies. There must be a team to "encourage, facilitate, even mentor" dynamic soon listable companies. Let's no longer lord it over as gatekeepers, you come to me and we see whether you can pass. Be proactive, engage, be flexible, if IPay88 wanted 28x earnings, I think it is reasonable, I think investors would grab it even. Because we are so ladened with very humdrum IPOs for the past few years already. 

3) Over-Surveillance - What I meant by that is surveillance on trading and possible collusions. We all know Bursa/SC have brilliant systems to track all our trades. But when it goes overboard, nobody wants to trade anymore for fear of getting into trouble. Did you know if a com

pany or an investor were to do a General Offer (usually at a premium to prevailing market prices), Bursa/SC can (and I heard do) trackback all BUYERS of the stock for the past 12 months. I mean, come on. Who dares to buy? As innocent as you heard a rumour from a pub, you'd feel you might be doing something wrong already to buy based on rumour. This is but one example and remeasures and traders can tell you plenty more.

4) Make Money - You cannot argue that people are shunning stocks because ALL PEOPLE will go to where they can make money. Take Bitcoins, many didn't even have an account or know where to trade these buggers, but because its volatile and trending, people will find a way when there's money to be made. People are shunning local stocks because there's not much money to be made...FULL STOP.

5) Going Private - Just look at the table above. Why are good companies going private in droves? Because the market is not giving them the valuations they think they deserve. Many will resurface later with better valuations in other exchanges. Or they do not think they need to raise capital anymore.

There are slightly less than 1,000 listed companies on Bursa. Around 60% will see no trades almost every day. That needs to be addressed. No liquidity for various reasons, no more reason to be listed. Something needs to be done here. Unfortunately, I can't help solve every single problem.

6) Most Important Shift In Paradigm - This would be the most important shift in listing paradigm, which seems to have bypassed Bursa/SC completely. Now companies are no longer listing to RAISE CAPITAL for growth like before. The paradigm has shifted to Private Equity/Venture Capital Funds to raise funds.

For example, a company could have listed now for 14x prospective earnings on Bursa, but instead, choose to take funding of RM150m (even more than what the company could have raised by listing on Bursa) and remain private. Hence the new capital will fund growth strategies and has a good chance to succeed. Two years later, the same company will go for listing but now net profit has more than tripled, thus listing at 14x prospective would yield a market cap of more than 3-4x than listing on Bursa two years back.

There's nothing wrong with that except that the company is now listing to help PE/VC to exit rather than to raise capital and allow investors to participate in the growth of the companies. Hence the valuations become fuller than say two years back, thus limiting the upside as well. (The delisting and relisting of Leong Hup has some semblance of that).

These are but just a few critical factors that the government has to address to rejuvenate the local bourse. Even if you do nothing, the local bourse will still have bull runs when the planets are aligned, but these ups and downs will not help mask deeper underlying problems in the long run.


bruno said...

It could also be a blessing in disguise.This bull market is ten years old and counting.It is not like the energizer bunny that can kept going as long as the owner changes the battery regularly.Sooner or later,this bull will be mauled by the big bear.Thirty,fifty or even seventy percent losses are possible.The market has been in a bubble stage for a very very long time.

The public have been bought by the idea that central bankers are their savior.Or that this rapist named Donald Trump is their grandfather's honey bunny.Trade wars,impeachment talks and all sorts of distraction by this sick sex maniac have investors and speculators looking the wrong way.When the bears suddenly started mauling,this will send the major indexes falling of the cliffs.

Those markets lagging the final stages of this bull market will not be hit that hard.Although not that hard does not mean that any investor and his dog can take the hit.For me at this stage if one has the staying power,it is better to go short than to buy long.Let us argue for arguement sake.The Dow at it's highest was around 27,600.Say it can go up around 10% more.That will be around 30,000.

What is the possibility of the Dow reaching 30,000 in the next two years.Or the Dow falling to 20,000 or even 15,000 in the next two years.My money is on the latter.

Peter said...

Bring back short selling. The current IDSS short selling is non attractive - too much hassle.
Treat short selling like normal buy trade ie T+2. This will create the volume.

Shorten the trading hours. Longer trading hours do not translate to bigger volumes.

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