KLSE'S Low Market "Velocity"

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??

My take:

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.

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...

Two Sides To LIQUIDITY
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.