AFTER the Philippines Stock Exchange Index, which is down 8.2% year-to-date, the FTSE Bursa Malaysia KLCI (FBM KLCI) is now the second worst-performing index in Asia this year with a year-to-date decline of 7.7%.
For foreign investors, who are likely using the US dollar as their base currency investing in the Malaysian bourse, their year-to-date return in dollar terms is even larger at negative 12.9%, as the Ringgit is down by 5.2% so far this year.
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One of the reasons for the underperformance of the local bourse is the relentless selling pressure that we have seen coming from foreign institutional shareholders.
In fact, based on data that has been compiled since 2014, net outflows were recorded in seven out of the last eight years. As can be seen from the chart, foreign flows to a large extent determine the performance of the FBM KLCI.
With the exception of last year, whereby the benchmark index rose 2.4%, despite the RM24.6bil net foreign outflows, the market has always gone the same direction as per foreign flows.
In 2020, despite the huge net foreign outflows, the 30-stock index provided positive returns on the back of the performance of the two main index-linked glove stocks, Top Glove Corporation and Hartalega Holdings, which accounted for 109 index points gain of the FBM KLCI.
Supermax, which was added with effect from Dec 21, 2020, provided negative returns of about four points to the FBM KLCI last year. Hence, although the 30-stock index gained 38 points last year, the index would have been at just 1,523 points and down 4.2% for the year, had the two glove stocks not perform as well as they did.
This year, the glove stocks have taking a beating and the three stocks alone contributed to a 65 points loss to the index (Note: Supermax has since been removed from the 30-stock index with effect from June 21, 2021 and was replaced by Mr. D.I.Y. Group).
Hence, if we were to add back the 65 points loss due to the sell-off among the glove stocks, the FBM KLCI will be at 1,567 pts as of Thursday’s close, or up 2.9% year-to-date from last year’s adjusted performance.
Nevertheless, the gyrating glove stocks should not be a reason for the benchmark index to be behaving the way it has over the past one and half years as there are other reasons too as to why the market has been unliked by foreign investors.
Perfect storm
For this year, the FBM KLCI underperformance is mainly due to a combination of factors that have led us to almost a perfect storm scenario, First, we have a severe economic challenge due to the continuous lockdown in key economic development areas like the Klang Valley, Second, we have a healthcare crisis with our frontliners burnt out and our healthcare capacity tested beyond the limits and of course the third, we have the never-ending political uncertainty.
The Emergency declaration early this year, which was introduced to tackle the pandemic, has failed to show the results that we were hoping for, resulting in further economic pain and suffering for the man on the street and businesses.
The manner in which the pandemic has been addressed doesn’t seem to be based on data or science, leading to chaos and flip-flopping policies, to the extent it has caused uneasiness too among foreign investors.
Even our National Recovery Plan (NRP) seems to be based on just arbitrary figures without the basis as to why the thresholds were chosen. As we are all aware, no investors like uncertainties, more so among foreign investors. How we have handled the crisis is truly disappointing and this is manifested in the daily numbers that we report in terms of positive cases and deaths.
On the bright side, the perfect storm has one silver lining – our vaccination drive, especially in the last two months being ramped up, is commendable.
Unsolved structural issues
Foreign shareholding on the local bourse has recently dropped to an all-time low of just 20.2% as at end of July 2021. This is even lower than the May 2010 reading of 20.3% and five percentage points lower than the 25.2% print in May 2013.
In fact, cumulatively, foreigners have net sold our equity market to the tune of RM73.2bil since 2014.
Malaysia’s market’s de-rating is not mainly due to the current perfect storm that we are in, but it has been a continuous spiralling downward journey for some time.
Malaysia is one market that used to enjoy a premium market valuation of about 15-20% when measured against other Asia markets, but today, that premium has turned into a discount of about 16%.
One of the reasons for this drastic underperformance is due to the country’s risk premium as a result of perceived political uncertainty. Clearly, we have been left out of the global equity markets rally and we need to address issues that are plaguing not just the market as it is, but the nation as a whole.
Last week, this column highlighted Environmental, Social, and Governance (ESG) issues that are perhaps a reason as to why the plantation stocks have underperformed the rally seen in crude palm oil.
A fortnight before that, structural issues related to our low wage structure was also highlighted as a reason as to why Malaysia has been left behind. Aside from this, Malaysia needs to regain back the political stability premium that it used to enjoy before GE14 as that premium provides can be a huge re-rating event.
How could this be achieved? As the next Parliamentary session is set for early next month and the government has promised to table a vote of confidence on the current Prime Minister Sept 7, there can only be three potential outcomes.
One is of course status quo, as the Prime Minister wins the vote and we could all return to the core issues related to running the country and tackling the pandemic.
Two, if the PM loses the vote. He would then need to tender his resignation and so does his cabinet, and a new government will be installed.
In accordance with Article 43(2)(a) of the Federal Constitution, which says the Prime Minister must be a Member of Parliament who in the judgment of the Yang di-Pertuan Agong, is “likely to command the confidence of the majority of the members of the (lower) House”.
Here, it is hoped that once a new Prime Minister is chosen, he or she is given full support from all the members of Parliament to bring the country out of this predicament of the pandemic.
Three, the sitting PM can extend an olive branch to the other side of the aisle by entering into a Confidence and Supply Agreement (CSA). This CSA is a short-term measure to address the political impasse and the nation should go to the polls when the time permits.
This could pave the way for reduced politicking and perhaps a unity government can be formed whereby major political parties are given government cabinet positions based on the number of seats held. One solution is to have just 22 cabinet ministers in the government and an equivalent number of deputies. The formula should be on basis of one cabinet and deputy post for every ten seats held by each of the political parties. In this way, Barisan Nasional abd UMNO, PKR, and DAP will have four full cabinet positions each, followed by Bersatu with three, PAS and GPS with two each, and Warisan with one. Two others are to be chosen among the remaining 14 MPs. The same formula is also applied to chose deputy ministers for the 22 ministries.
With the tabling of the 12th Malaysia Plan (12MP) and Budget 2022 next on the horizon, it is hoped that the government also takes the opportunity to formulate medium to long-term strategies to address other structural issues, which are beyond what is mentioned above. We need to have tax reforms as we are not taxing Malaysians enough and many more other reforms in areas related to education, healthcare, social services, public housing and how are we building our infrastructure, and so on. This requires strategies that are not only deployed which can give an immediate effect but plans that could set Malaysia well into the future.
Hence, other than earnings, the next couple of months is going to be crucial for the market in terms of events and whether Bursa Malaysia can be re-rated or otherwise.
Pankaj C Kumar is a long-time investment analyst. The views expressed here are his own.