"Bursa Malaysia (then) may have difficulty in increasing retail participation in the market because by and large individuals are risk-averse, loss-averse, are not "over-confident" and may be reluctant investors because of asymmetric information and a long history of insider trading and lax regulatory control and discipline of Bursa Malaysia".
By g sivalingam
SHARES on Bursa Malaysia have been close to their all-time high in recent months. The FTSE Bursa Malaysia KL Composite Index (FBM KLCI) has breached 1,590. This surge in the index has been due to the speculative activities of foreign and local institutional investors and local retailers.
According to a recent report in the Business Times, "foreign institutional funds saw net buying of RM3.4 billion (S$1.4 billion) in the Malaysian stock market last month while local retailers and institutional funds were net sellers, disposing of RM600 million and RM2.1 billion worth of shares respectively". It appears that institutional investors are dominant in the market compared to retail investors. At the same time as the market has been peaking, the trading volume has gone down. For instance, the volume of units traded on April 9 is only about a third of the volume of units traded on March 7.
The peaking of the FBM KLCI then is not due to an increase in trading volume, but more due to the selective buying and selling of stocks that make up the KLCI. The low trading volume among retail investors in the Kuala Lumpur Stock Exchange or Bursa Malaysia has been a cause of concern for the management of Bursa Malaysia. In the 1990s, Bursa was concerned with the lack of institutional investors. Although the market capitalisation of Bursa Malaysia as a percentage of GDP is high, its trading volume is low from a regional perspective.
The retail average daily value in Bursa Malaysia has declined since it reached a high of RM806 million in 2007. It declined to RM283 million in 2008 before it climbed to RM442 million in 2011. However, the percentage of investors or participants who are retail investors has declined from 37 per cent in 2007 to 26 per cent in 2011. The prospects of increasing the trading volume among retail investors in 2012 appear dim as the economy is expected to grow at a slower rate and consumer and investor confidence remains low. Inflation is a problem.
Trading volume has declined from RM53,316.13 million in January 2011 to RM39,869.54 million in March 2012.
There are concerted efforts to increase the trading volume to generate income and commissions not only for Bursa Malaysia and the remisiers, but also to generate funds for corporations, interest earnings and commission for banks, and capital gains for retail and institutional investors.
The current focus of Bursa Malaysia appears to be to increase the number of individual retail investors to get them to be active participants to increase the trading volume. This is because there is a limit to increasing the trading volume of local institutional investors, many of whom are government-linked corporations (GLCs). The GLCs are unlikely to be active traders given their bureaucratic set-up.
About 40 per cent of the stocks in Bursa Malaysia are held by government-linked corporations and these stocks are hardly traded. About 20 per cent to 30 per cent of the stocks are held by foreign institutional investors who create a great deal of volatility in the market as foreign portfolio investment decisions are made overseas.
Malaysia's experience with foreign portfolio investors has been that they invest when the trade balance and current account balance are high and increasing, and they leave when foreign trade receipts are falling and negative. They are also active in Bursa Malaysia when returns look more attractive in Malaysia compared to the equity markets in the advanced industrial countries. This introduces volatility and risk in the market and individual retail investors are averse to trading in a market where they are disadvantaged by asymmetrical information.
The government and the foreign and local institutional investors are more likely to have greater access to prior and accurate information as to when the foreign portfolio investments move in and move out of Bursa Malaysia. The individual retail investors suffered great losses in 1998 when the KLCI crashed to below 300 during the Asian Financial Crisis in 1997-98. The KLCI was well above 1,200 in 1996.
The remaining 30 per cent to 40 per cent of the stocks in Bursa Malaysia are held by mainly ethnic Chinese family firms that are also averse to trading their shares. They hope for capital gains as a leverage when negotiating with banks for loans. There is also a sense of insecurity among these Chinese family firms in the context of Malaysia's New Economic Policy prescription of 30 per cent ownership for bumiputras (sons of the soil) and the dilemma of dealing with the concept of "Kedaulatan Melayu" or Malay hegemony.
Empirical studies of Bursa Malaysia testing the famous "Efficient Market Hypothesis", made popular by Eugene Fama of Chicago University, have consistently found that the Malaysian stock market is semi-strong form efficient.
However, entry and exit into the market is not easy as listing is done largely on the merits of the case despite Bursa Malaysia's claims that it has moved to disclosure-based listing. Exit is also difficult as the government is wary of employment and economy-wide implications of listed firms going bust, hence its eagerness to provide aid to distressed listed firms.
Since trading is thin, it is hardly likely that the market is efficient. It has also been observed by some eminent economists that the successful test of the Efficient Market Hypothesis does not mean that the market is efficient. There are built-in biases in the hypothesis that will produce a result to show that either the market is strong form efficient, semi-strong form efficient or weak form efficient. There are only three outcomes possible and they all point out that the market is efficient, although an institutional analysis will show that the market is designed to serve the interests of the government. Bursa Malaysia is regulated by the Securities Commission and the central bank (Bank Negara Malaysia), which are in turn responsible to the Minister of Finance, who also happens to be the Prime Minister.
The institutional trappings of Bursa Malaysia are not lost on retail investors who by and large are short-term investors and invest small amounts of money, unless of course they can get loans from the banks for share trading. The retail investors are on the whole risk-averse given the current and past episodes of insider trading. They will on the average invest only their windfall gains as "over-confidence" is not a trait of individual investors given their primary socialisation in an authoritarian culture.
There is also pressure on the government and GLCs not to invest in risky investments and this does not help to increase trading volume. The government already has substantial investment funds in Bursa Malaysia as the Employees' Provident Fund (EPF) that it manages controls about one third of the FBM KLCI. In recognition of this fact, a former EPF employee in charge of investments is now the chief executive officer (CEO) of Bursa Malaysia. The current CEO is also former head of a leading commercial bank, reflecting the key role played by institutional investors and banks in shaping the growth and development of Bursa Malaysia.
Eyes on EPF
The KLCI average dividend yield for 2011 was 3.4 per cent, indicating that any naïve investor in the market should at least earn an equal percentage by investing in the stocks listed in the index. The EPF was able to pay its account holders a dividend of 6 per cent in 2011. In the 1970s, when the interest rate was higher, the EPF paid a dividend of nearly 8 per cent to account holders.
The overwhelming majority of employees contribute about 10 per cent of their salaries to the EPF and are wary of the EPF's investments in a stock market that is risky, given its track record of episodes of insider trading.
The EPF is thus under pressure not to be active in risky trading given that the dividends it declares are watched closely by workers, who want a say in how the EPF is managed.
Individual investors are averse to active trading in the market given that they are risk-averse and also loss-averse. They are loss-averse in the sense that they may trade quickly to realise a gain but they will keep the equity or asset if it makes a loss, hoping that over time they can sell it for a profit and realise a gain.
Bursa Malaysia then may have difficulty in increasing retail participation in the market because by and large individuals are risk-averse, loss-averse, are not "over-confident" and may be reluctant investors because of asymmetric information and a long history of insider trading and lax regulatory control and discipline of Bursa Malaysia.The writer is Visiting Senior Research Fellow, Institute of Southeast Asian Studies, Singapore