Challenges faced by Malaysian investors
IF Rip Van Winkle had been a Malaysian who went to sleep in 1996 and just roused from a 10-year slumber, chances are he would not recognise our stock market today. From a progressive market that had great aspirations to become a regional financial centre, it has since become marginalised in the eyes of many international investors.
The market’s loss of appeal is not just an issue of size, as Malaysia’s bragging rights to having the third largest stock market in Asia in the mid-1990s were never going to be more than just a transient claim. Given its bloated capitalisation vis-à-vis the size of the economy, it was inevitable that in time, the stock markets of other larger economies would catch up and overtake Malaysia’s as they developed.
What was more painful to watch was the erosion in advances made against other countries back then, as we took a backseat while they made rapid progress. Recall, we were one of the pioneers in the region for regulated short-selling. Covered warrants had already been introduced in the early 1990s. We were a relatively early introducer of futures trading. We listed property trusts way before real estate investment trusts became popular in Asia.
But the biggest loss of all has been the evaporation of investor interest, both domestic and international, over the last decade as reflected in the sharp decline in market velocity. This can be attributed to a host of reasons, ranging from loss of market confidence to corporate governance concerns, setbacks due to exchange controls, lack of attractive initial public offerings to rejuvenate interest and generally lagging in market innovation compared with markets such as Singapore and Hong Kong.
This has, in turn, indirectly led to the dislocation of one of the basic tenets of investing - that markets perform when the economy goes through a period of secular growth.
This principle held true in the 1990s even post-Asian crisis, but the experience of 2001 to 2005 has been dramatically different. Whereas during the earlier period, a percentage point of nominal gross domestic product growth had led to an average of 2.4% earnings growth, this multiplier had diminished in the recent past to an average of only 1.5%. This situation was further exacerbated by the weakened impact of each percentage point of earnings growth on share prices.
Explanations for this include the shift in growth drivers of the economy vs. the stock market, the lack of pricing power for many businesses and the deflation in the market’s price to earnings valuation, partly as a result of the weakening demand for stocks due to the factors mentioned above.
I have no doubt that the correlation between the economy and the market will eventually be re-established, as the natural course of a market cycle takes its own path. However, it is difficult to say how extended this current market phase will last.
Until a turning point is reached, the environment for investors will not be as favourable as in the 1990s. Our statistical analysis shows that back then, a random investment (in terms of timing and stock picking) would have a significantly greater than 50% chance of earning a positive return, as the first simulated chart shows.
With the market able to generate a natural return, you did not have to be a great investor to do well. Today, the market configuration has changed considerably. Not only is the probability of earning a return lower, the average return has also diminished, as shown in the second chart. I am sure your own personal investment experience would attest to this.
How should rational investors respond? In either of two ways. First, ensure when investing in the local stock market that it is not a random game of chance i.e. they have to possess some insights on stocks, be adept at market timing, or be able to get value-added advice from good analysts, stockbrokers or private bankers, or they should invest through professional managers.
Second, look for investment alternatives, onshore and offshore. Fortunately, the investment universe does not revolve around only local stocks and in a long-only style as per the classical Peter Lynch schooled buy-and-hold approach. There are many other ways to play the game and the variety of options will further widen over time.
The market’s loss of appeal is not just an issue of size, as Malaysia’s bragging rights to having the third largest stock market in Asia in the mid-1990s were never going to be more than just a transient claim. Given its bloated capitalisation vis-à-vis the size of the economy, it was inevitable that in time, the stock markets of other larger economies would catch up and overtake Malaysia’s as they developed.
What was more painful to watch was the erosion in advances made against other countries back then, as we took a backseat while they made rapid progress. Recall, we were one of the pioneers in the region for regulated short-selling. Covered warrants had already been introduced in the early 1990s. We were a relatively early introducer of futures trading. We listed property trusts way before real estate investment trusts became popular in Asia.
But the biggest loss of all has been the evaporation of investor interest, both domestic and international, over the last decade as reflected in the sharp decline in market velocity. This can be attributed to a host of reasons, ranging from loss of market confidence to corporate governance concerns, setbacks due to exchange controls, lack of attractive initial public offerings to rejuvenate interest and generally lagging in market innovation compared with markets such as Singapore and Hong Kong.
This has, in turn, indirectly led to the dislocation of one of the basic tenets of investing - that markets perform when the economy goes through a period of secular growth.
This principle held true in the 1990s even post-Asian crisis, but the experience of 2001 to 2005 has been dramatically different. Whereas during the earlier period, a percentage point of nominal gross domestic product growth had led to an average of 2.4% earnings growth, this multiplier had diminished in the recent past to an average of only 1.5%. This situation was further exacerbated by the weakened impact of each percentage point of earnings growth on share prices.
Explanations for this include the shift in growth drivers of the economy vs. the stock market, the lack of pricing power for many businesses and the deflation in the market’s price to earnings valuation, partly as a result of the weakening demand for stocks due to the factors mentioned above.
I have no doubt that the correlation between the economy and the market will eventually be re-established, as the natural course of a market cycle takes its own path. However, it is difficult to say how extended this current market phase will last.
Until a turning point is reached, the environment for investors will not be as favourable as in the 1990s. Our statistical analysis shows that back then, a random investment (in terms of timing and stock picking) would have a significantly greater than 50% chance of earning a positive return, as the first simulated chart shows.
With the market able to generate a natural return, you did not have to be a great investor to do well. Today, the market configuration has changed considerably. Not only is the probability of earning a return lower, the average return has also diminished, as shown in the second chart. I am sure your own personal investment experience would attest to this.
How should rational investors respond? In either of two ways. First, ensure when investing in the local stock market that it is not a random game of chance i.e. they have to possess some insights on stocks, be adept at market timing, or be able to get value-added advice from good analysts, stockbrokers or private bankers, or they should invest through professional managers.
Second, look for investment alternatives, onshore and offshore. Fortunately, the investment universe does not revolve around only local stocks and in a long-only style as per the classical Peter Lynch schooled buy-and-hold approach. There are many other ways to play the game and the variety of options will further widen over time.
posted by rpg at
11:08 PM
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