A couple of weeks back, we highlighted the fact that Bursa Malaysia had lost its lustre among portfolio funds. And, as a result, the local bourse has been a chronic underperformer since the heyday of the 1990s super bull cycle. Interest from foreign investors, in particular, has been lacklustre. According to statistics from Bursa, foreigners were net sellers on the local bourse in seven of the last 12 years — with net outflow totalling nearly RM36 billion over the period.
This can be attributed, in part, to Malaysia’s shrinking weightage in major benchmark indices, widely tracked by global fund managers. This negative impact is further compounded by the rapid rise in popularity of index-linked mutual funds and index ETFs (exchange-traded funds) over the last decade or so. As we wrote previously, Malaysian stocks corrected sharply from bubble valuations post-Asian financial crisis (AFC) while markets in Taiwan, South Korea, India and, especially, China gained prominence.
The Chinese stock market, which carried a mere 1% weightage during the AFC, now accounts for more than 32% of the MSCI Emerging Markets Index (as at end-January 2022) — a reflection of the country’s rapid economic growth as well as the increasing value (market capitalisation) of its listed companies. The combination of both factors led to the drop in Malaysia’s weightage in the MSCI EM Index from a peak of 20% in 1994 to a little over 1.3% by end-2021.
Malaysia also did itself no favours by imposing unconventional capital controls during the AFC and making invalid all offshore transactions in the ringgit (a measure that remains in place to this day). The blatant rent-seeking debacle surrounding CLOB (Central Limit Order Book) shares also created moral hazards and raised questions over the integrity of contracts and laws for future potential investors.
A quarter of a century since the AFC, the Malaysian stock market is still consistently underperforming. The table shows the comparative performances of benchmark indices in Vietnam, Singapore, Indonesia, Thailand, South Korea, the Philippines and the US for the past one year, as well as five, 10, 15, 20 and 25 years. (Note that prior to 2009, the Kuala Lumpur Composite Index comprised 100 of the largest stocks. It was then replaced by the current FTSE Bursa Malaysia KLCI, which consists of 30 stocks. The FTSE Bursa Malaysia Top 100 Index is similar to the previous KLCI.) Why is this so? More importantly, if share prices have underperformed, does this mean stocks are cheap? And if so, then prices must surely rise in the foreseeable future.
We had previously compared the market cap for all listed companies to GDP for select countries (see Chart 1). By this popular metric, relative valuations for Malaysian-listed companies are not cheap. We also analysed the local bourse’s own priceto-earnings (PE) valuations over time — and multiples have not got lower. Bursa was trading above its long-term average PE (of 16.8 times from 1997 to 2019) at 17.7 times pre-pandemic (see Chart 2).
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So, if prices have underperformed but valuations are still not cheap — PE has fallen somewhat during the pandemic and is now around 15.9 times — this can only mean earnings are underperforming.
Indeed, when we compared the earnings per share (EPS) of the relevant benchmark indices for the period 2003 to 2021, earnings growth for Bursa-listed companies was unmistakably lagging (see Chart 3). In fact, both EPS and revenue have been on the downtrend since peaking around 2012 (see Chart 4).
Could it be that the FBM KLCI is not representative of the broader market, given that it is composed of only 30 stocks? But we see the same trend for the index tracking the 100 largest stocks, which account for more than 80% of total market cap for the exchange. As a comparison, the Standard & Poor’s 500 index accounts for about 78% of total market cap.
Perhaps the listed companies themselves are not representative of Malaysia’s economy? For instance, manufacturing and E&E (electrical and electronics) stocks barely feature in the major indices, although the manufacturing sector makes up roughly one-quarter of Malaysia’s GDP whereas E&E contributes to about 7% of the economy. The FBM KLCI is dominated by banks, telcos, oil and gas, plantation and utilities stocks, the majority of which have not done well in recent years. For instance, loans growth for banks slowed materially from around 2014, when Malaysia ended the Developer Interest Bearing Scheme (DIBS) and precipitated the property sector downturn.
That said, Malaysia’s per capita GDP growth has also underperformed, expanding only 77% between 1997 and 2019, slower than that of Indonesia, Thailand, Singapore and the Philippines and well below the growth in Vietnam and South Korea. Prior to the AFC, from 1990 to 1997, Malaysia was growing faster than all these countries, and only a little slower than South Korea. Obviously, the AFC was a critical turning point for the country. The underperforming GDP and stock market are the symptoms. We will explore the root cause for the malaise in the next part of this series.
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The Global Portfolio fell 0.6% for the week ended Feb 16, but fared better than the broader market sell-off. In addition to worries over inflation and interest rate hikes, investors were also jittery as geopolitical tensions over Ukraine ratcheted higher. The top gainers for the week were Airbnb (+10.1%), Grab Holdings (+8.8%) and The Walt Disney Co (+6.2%). On the other hand, Adobe (-8.4%), Home Depot (-3.9%) and Microsoft (-3.8%) were the notable losers. Total returns now stand at 61.4% since inception. This portfolio is outperforming the MSCI World Net Return Index, which is up 56% over the same period.
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Cover photo: Bloomberg
