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Wednesday, September 1, 2010

Ordinary Malaysians shun stock market amid stalling recovery

KUALA LUMPUR, Sept 1 — Individual investors continue to shun the Malaysian stock market as public confidence remains shaky due to fears that the market’s recovery following the 2007 US sub-prime mortgage crisis may not be real.

Economists and analysts said that a slowdown in foreign investments, poor enforcement against unscrupulous activities and overseas competition for local funds also contributed to the lack of interest among ordinary Malaysians in investing in the local share market.

Kenanga Investment Bank economist Wan Suhaimie Wan Saidie said most investors were tired of the Malaysian stock market, which was not as competitive as other bourses in the region, and added that participation was also muted due to the lack of foreign direct investment (FDI).

“There is a correlation between retail participants and foreign investment flows,” he said, referencing the massive 81.1 per cent drop in foreign direct investment (FDI) Malaysia experienced last year.

“If foreign investment flows are not forthcoming individual investors are more likely to shun the local market.”

He said there was a possibility that investors might “go back to hibernation” until they saw signs of a firm recovery, but cautioned that the flow information both locally and abroad did not suggest that things were getting any better.

Until then, however, investors still had many other options to buy both locally and abroad or put their money into properties and commodities, he explained.

The Kuala Lumpur Composite Index’s 45 per cent gain last year lagged behind Southeast Asian neighbours even after the government announced stimulus plans totalling RM67 billion to help pull the region’s third-largest economy out of a recession.

The slump in trading by individuals coincided with an exodus by foreigners from Asean’s second-biggest stock market, leaving Bursa Malaysia more reliant on domestic institutional funds.

Overseas investors have sold a net RM1.36 billion of Malaysia’s equities this year, adding to RM8.57 billion withdrawn in 2009 and RM38.6 billion that flowed out in 2008, paring their share of local stocks down to 20.6 per cent at the end of April from 27.5 per cent in April 2007.

Wan Suhaimie was critical of the level of participation in the market by statutory funds such as Employees Provident Fund (EPF), which he said distorted the market as they focused only on index-linked stocks.

On March 30, Prime Minister Datuk Seri Najib Razak revealed that the state-controlled EPF accounted for 50 per cent of daily trading volume in the equity and bond markets. Additionally, more than half of the RM417.1 billion market value in the benchmark stock index is owned by government-linked funds, according to calculations by Bloomberg.

“It doesn’t really reflect the real overall performance of the stock market. Most of the information and research is skewed towards big cap stocks,” he said, adding that it was possible that investors might miss out on smaller companies that have better growth potential because of this.

A Hwang-DBS remisier who wanted to be identified only as Kok explained that, during good times, retail investors make up 60 to 70 per cent of trading value in a normal market.

However, according to a Bloomberg report, trading by individuals have fallen to as low as 20 percent of trading value from more than half before the start of the 1997 Asian financial crisis, when the KLCI slumped by a record 52 per cent.

Kok said the battering individual investors took in 1997 and the recent sub-prime crisis led many to put their money in safer alternatives like unit trusts or sukuks (Islamic bonds), adding that many were also still holding onto stocks that had yet to recover.

“With the market in such a lacklustre mode, you can’t make money punting,” he said. “The market is just drifting. The main market movers are just blue chip index counters... Most retail investors are still on the sidelines nursing their wounds.”

“Any spare money they’ll probably keep in interest-bearing accounts or, if they have more money, they’ll probably just park it with a fund manager.”

Most individual savings started shifting to mutual funds and unit trusts since Malaysia’s economy went into a recession in 1998 but have not returned to stock trading even as the economy expanded at an annual average of five percent over the past decade and the benchmark index more than doubled, Bursa Malaysia CEO Yusli Mohamed Yusoff said in June.

In order to boost retail investors’ share of trading to closer to one-third and tap into Southeast Asia’s second-highest savings rate, Bursa is currently working with brokerages and banks to encourage investors to open up accounts and pursue online trading.

However, Kok said he felt that investors were still wary of trading on the market because they were not convinced that Malaysia’s economic recovery was real.

“When you talk about six or seven per cent (GDP) growth, I suppose you and I don’t see it,” he said.

A broker with a local investment bank who declined to be named was similarly sceptical of the strength of the market’s recovery, pointing out that the KLCI, which is used as a bellwether for the Malaysian stock market, focused only on selected blue chip stocks.

“It is very obvious that the index, targeting only 30 counters, is not a true reflection of the overall market. A lot of the companies are actually really going down,” she said.

“Because the downtrend from ‘07, until today, in terms of all those general stocks that people buy and sell, a lot of them are still very much at the bottom.”

She added that retail investors have also been “very quiet” partly because they had lost confidence in market regulators, citing the recent case of furniture make Kenmark Industrial Co Bhd.

Kenmark’s troubles began in late May when its Taiwanese managing director James Hwang disappeared mysteriously — leading to a plunge in share price and plant closures in Port Klang and Vietnam — only to resurface nearly a week later, claiming his absence was due to illness.

During Hwang’s absence, Datuk Ishak Ismail entered the market and amassed shares amounting to a 32.36 per cent stake in the company over 10 days at prices of between 5.8 sen and 6.0 sen, claiming he had done so to help out his friend Hwang and offer re-employment to the company’s workers.

However, Ishak later sold his direct and indirect stake in Kenmark between June 9 and June 11 at between 14 sen and 16 sen after failing to convince Hwang to return to the company.

The Securities Commission finally stepped in on June 16 when it obtained a High Court order to stop Ishak from using or dealing with the RM10.16 million proceeds from the sale of shares in Kenmark as part of a move to probe possible insider trading.

Kenmark’s share price plummeted from a high of RM0.85 to just RM0.07.

“Stocks can drop from a dollar to penny stocks... These sorts of events happen in the Malaysian market, yet the authorities are not taking action,” the remisier said.

“A company doesn’t just fold up within a month. I can understand how those investors feel.”

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