THE government’s decision to reinstate the cap that traders have to pay in stamp duties for stock market transactions, albeit at a higher level than before, has provided a sigh of relief for market participants.
The background to the government’s original proposals which were contained in Budget 2022 and which was announced in Oct 2021, had stemmed from a need to boost public revenues. The government is facing a record annual budget of more than RM332.1bil for 2022 and is aiming to jump start the economy in this year.
Hence, Budget 2022 had proposed a hike in stamp duties on stock trading and a one-off windfall tax Cukai Makmur or prosperity tax, among others.
Under the proposal, the government was to increase the stamp duty rate to 0.15% from 0.1% for stock trading, as well as to remove the RM200 stamp duty cap for such trades.
Not surprisingly, this raised concerns among investors as the cost of stock trading could increase significantly in 2022. The fear is that this would dampen trading and participation on the local bourse.
This contributed to the descent of the main FBM KLCI index of the local bourse to below 1,500 points. The index has gained back its losses this week. The last time the index went below 1,500 was prior to the pandemic in December 2011.
For many years, Bursa Malaysia had experienced low retail participation in the stock market. That was until 2020 when the Covid-19 pandemic hit, when people under lockdowns started to show an interest in the stock market.
Bursa Malaysia had said the higher trading costs, as proposed in Budget 2021, would make it more difficult for intraday traders to implement their trading strategies. It said that the traders accounted for 10% of the traded value on the local bourse.
Bursa Malaysia also said the proposed changes in stamp duty rates would make the local stock exchange Asean’s most expensive market to trade in.
Former investment banker and investor Ian Yoong notes that transaction costs for equities have been falling globally over the past decade.
“If the cap on stamp duty was to be removed as proposed in the Budget 2022, transaction costs for Malaysian equities would escalate substantially for large trades,” he says.
He points out that the impact on high frequency and proprietary traders will be significant, but not so much on retail investors.
“High frequency and proprietary or prop traders could buy and sell the same stock many times in a day at razor thin brokerage rates. High frequency traders (HFT) operate under a veil of secrecy and are driven by algorithms, HFTs bought and sold the same stocks 10 to 20 times daily in the euphoria of 2020,” he adds.
Yoong reckons that the removal of the RM200 cap and the new stamp duties could translate to a 22% increase in transaction cost.
“In the instance of a retail investor, the transaction cost for a trade below RM100,000 is 0.53% (brokerage and service tax). Budget 2022 had proposed to increase transaction costs to 0.65% (brokerage and stamp duty).
“This translates to a RM60 or 22% increase in transaction cost for a trade of RM50,000. The increase in transaction cost for the retail investor is therefore tolerable,” he says.
Better performance in 2022
The government announced that there were no plans to scrap the cap on stamp duties but it would increase the cap to RM1,000, market participants were relieved.
“Although the cap is higher than the previous RM200, the news is still positive for the stock market that has been lacklustre after the announcement of the stamp duty hike.
“We expect the market to do better in 2022 driven also by the recovery in economic growth,” Rakuten Trade Sdn Bhd head of equity sales Vincent Lau tells StarBizWeek.
He expects retail participants to remain buoyant in the local stock market despite the higher cap.
Lau says that in 2021, retail investors made up about 32% of the daily average value on Bursa Malaysia, lower than 38% in 2020.
On Thursday, the Ministry of Finance (MoF) announced that the stamp duty cap for the trading of shares will be reinstated at RM1,000, with a rate of 0.15%.
The decision was arrived at after taking into consideration the views of various parties, including those in the stockbroking industry, to ensure that the local stock market remains vibrant and dynamic.
It said stamp duty amounts exceeding RM1,000 would be remitted, and that the remittance would apply to all contract notes from Jan 1, 2022 until Dec 31, 2026 for transactions of stocks listed on Bursa Malaysia.
“The government will always ensure that the tax treatment of taxpayers is based on fair and equitable principles, and remains committed to complying with international best practices,” MoF added.
Bursa Malaysia Bhd, whose share price has been battered down since the announcement of the higher stamp duty on stocks trading and removal of the ceiling, has lauded the move to reinstate the cap.
Bursa Malaysia chief executive officer Datuk Muhamad Umar Swift said the ministry’s agility in responding to market operating conditions is very much appreciated.
“This moderated approach to the changes on stamp duty exemplifies the government’s attentiveness to industry feedback, and in managing the delicate balance between tax collection and nurturing growth in our capital market,” he said.
Meanwhile, chairman Tan Sri Abdul Wahid Omar said as a market regulator, Bursa Malaysia is committed to continuously engage and collaborate with all market participants, towards creating an attractive, vibrant, and sustainable marketplace.
“The move by MoF maintains our market’s regional competitiveness and attractiveness. The exchange together with the MoF will continuously ensure that our marketplace remains an attractive destination for investors and issuers to invest and raise funds,” he said.While many investors would describe the last several years as the golden years for the stock markets, it is not entirely the case of the Malaysian market.
This was despite Bank Negara having reduced lending rates to a record low of 1.75% since July last year.
Over the past three years, the US stock markets have been on a bull run despite the Covid-19 pandemic disruptions. The S & P 500 has been experiencing total returns of 1.5%, 18.4%, and 29.6%, respectively. While the Dow Jones saw 25%, 9.7% and 18.9%, respectively.
The Malaysian market has been on a decline over the past three years except in 2020, which enjoyed a 2% increase in the index.
Rollercoaster ride
This year has been a rollercoaster ride for the local stock market, with the FBM KLCI being one of the worst performing indices, underperforming most of its regional and global peers.
In 2021, the index declined more than 5.7%, while the Indonesian Jakarta Composite Index, Singapore Straits Times Index, Stock Exchange of Thailand had risen by 10.08%, 9.8% and 14.37%, respectively, while the Philippines Stock Exchange declined by 0.24%.
Kenanga Research reckons that there is plenty of liquidity in the ecosystem that has yet to be deployed.
“For now, while the SRR and OPR remain low, M2 supply has been strong and liquidity is above average. This reflects the case that there is plenty of liquidity seen not put to work investing in risk assets,” it says in its market strategy report.
Meanwhile, Lau says that while the Omicron variant remains a risk, it would not significantly derail global economic growth.
“We expect the ‘recovery play’ to continue in 2022.
“The market has likely also priced in the risk of the Omicron variant, interest rate hikes in the US and the Federal Reserve plans to reduce its bond purchasing programme which has been made known,” he adds.