Cover Story: Bringing


Feb 2018

When was the last time you heard a cab driver talking about buying shares in the local stock market? Or when you exchanged hot tips with friends or distant relatives over dinner?

It would not be a surprise if you can’t recall any of the above, simply because it does not happen much nowadays. Retail investors have long shied away from the local stock market. Many have turned instead to unit trusts or real estate, particularly during the recent property boom.

For Gen Y, investing in the stock market is probably not their cup of tea, at least not at the moment. They choose to put money in alternative investments, such as cryptocurrencies, which are seen to be more exciting and lucrative (see “When the stock market can’t compete” on Page 72) . Others are investing their savings in business start-ups, hoping to become the next Mark Zuckerberg or Jack Ma.

The lacklustre retail interest is affecting the local stock market ecosystem, indications of which include market velocity and vibrancy.

The regulators have known about this problem for a long time, probably since institutional funds became the dominant investors in the local market. Retail participation has hovered at around 20% — if not lower — for years. Indeed, retail participation was just about 14.6% by value last month.

When Bursa Malaysia Bhd CEO Datuk Tajuddin Atan took over in February 2011, he made it his top priority to boost retail interest.

Now, the regulators are taking action to lure veteran retail investors who have been gone missing for quite a while (some of whom still boast of the big sums they made during the super bull run in the 1990s) as well as the younger generation who don’t quite know that equity investment does not have to be a risky game.

Last week, Prime Minister Datuk Seri Najib Razak announced a list of measures to whet investor appetites, including a volume-based incentive programme and a six month-waiver on trading and clearing fees for new investors who have never had a Central Depository System account.

Najib also announced that shares in mid and small-cap companies would be exempted from stamp duty for three years from March.

The Association of Stockbroking Companies Malaysia (ASCM) views the measures as a “tremendous leap forward towards improving market performance”.

In a statement last Friday, ASCM said the new measures, which will ease stock trading rules, will boost trading velocity in terms of volume and turnover, and expand the investor base.

Kenanga Investment Bank executive director and head of equity broking Lee Kok Khee says the measures are holistic in nature and in the right direction to increase retail participation as well as provide greater depth to the market.

Shareholders of Bursa Malaysia Bhd appear to have reacted positively to the news. The counter is up 7.2% year to date and up 30% year on year at last Friday’s close of RM10.82.

Short selling for all

One measure that has drawn much attention is that all investors will be allowed to conduct intraday short selling (IDSS), which is currently limited to licensed proprietary traders. Only 280 counters listed on the Main Market are permitted for IDSS.

Securities Commission chairman Tan Sri Ranjit Ajit Singh, however, has clarified that naked short selling is not allowed.

“We still require [stock] borrowing arrangements in place. We are very, very clear [about this matter],” Ranjit told the media last Friday at the World Capital Markets Symposium 2018, pointing to compulsory requirements to participate in IDSS, such as the Stock Borrowing and Lending agreement.

He said Bursa has adequate safeguards to facilitate retail traders’ involvement in short selling, regarded as a hedging tool in a bear market. However, naked short selling — without borrowed scripts — is not allowed.

Kenanga’s Lee adds that the measures, such as opening up IDSS to investors other than proprietary day traders (PDTs), allows recognition of a broad range of participants in the market. There are less than 100 PDTs on Bursa. They account for about 8% of trades by value.

“A broader range of participants would allow brokers to tailor their products to cater for them, resulting in a more vibrant and active market.”

ASCM notes that IDSS will increase daily transactions as there will now be a long/short market. With adequate and effective controls, IDSS will enable investors to trade both ways. IDSS will also have a stabilising effect on market prices.

IDSS will not only improve liquidity but also increase the velocity of the market, subject to certain rules and regulations, as it provides trading opportunities in any market conditions, according to CIMB Equities Malaysia.

One of the challenges for short selling is the availability of sufficient scrip for lending. It is understood that the SC will ensure decent returns for investors who park their shares for lending.

Nonetheless, some quarters opine that Bursa is not a market that has sufficient depth for active short selling.

Kenanga’s Lee says potential risks that could stem from the intraday short selling initiative would not be confined to investors alone.

“The intermediaries such as the brokers would still need to manage the risks, educate the investors and ensure that the initiative does not disrupt the market or cause losses to people who are unaware of the risks,” he says.

Mid and small-cap fever

Lee also views the exemption of stamp duty for three years for mid-cap counters as an extension of the Mid and Small Cap Research Scheme launched last year. “This helps to spur trading and investment interest for mid and small-cap counters,” he tells The Edge.

Currently, only structured warrants and exchange-traded funds are exempted from stamp duty.

“The extension of that stamp duty exemption to the mid and small-caps will lead to a more active market and enhance market depth — the expectation is that active trading can extend from the current universe of the top 100 counters to perhaps the top 400 stocks,” he adds.

CIMB Equities Malaysia says the stamp duty waiver for these stocks will be a big game changer as it will attract more investors to this space because of lower transaction costs, and enable this segment to gain more traction and get on the radar of investors.

This, says the research firm, will help highlight mid and small-caps to investors and provide them with the opportunity to fulfil their potential.

Should there be an increase in demand for mid-cap shares given the reduced cost of investment, the question then arises as to whether there will be enough supply of shares, given the tight shareholding structure of most companies in this category.

Lee acknowledges that Malaysia is unique in the sense that many promoters and founders of the companies still hold more than a 50% stake. “You don’t see that in global markets such as the US or the UK.”

“While you can’t force the controlling shareholders to sell, the greater coverage provided by the Mid and Small Cap Research Scheme and now, the additional incentive through the stamp duty exemption, will certainly bring about greater interest and demand for good mid and small-cap counters.

“This will invariably lead to a valuation uplift for the counters, providing the catalyst for the promoters to increase their public spread through shares placements to both institutional and retail investors,” he says.

Liberalisation of margin financing
To improve investors’ access to more funding, the regulators are liberalising margin financing. Non bank-backed securities firms and investment banks will have more leeway to provide margin financing for their clients.

The existing hard cap on lending imposed on brokers — currently set at 200% of shareholders’ equity — will be lifted. Instead, brokers will apply the capital adequacy ratios according to the risk-based framework. This increases the lending capacity of securities firms for margin share financing. It is understood that the new measure does not include altering the margin ratios for share financing.

Investors who have good credibility will be able to leverage more and hence have more capital in hand to trade or invest in the market.

By the same token, this raises concerns that stockbroking firms may take on higher risks than they should. Like it or not, stock market crashes can be unpredictable. “High-risk margin financing could put securities firms in deep trouble when the market is falling like a rock,” says a dealer. “In this case, stockbroking firms need to be disciplined and prudent in terms of risk management.”

Inter-Pacific Asset Management CEO Lim Tze Cheng says he is positive about the measures.

“In 2016, retail participation in Malaysia was only 20%, I think we moved to the institutional model too early, so we think the measures introduced — such as the volume-based incentive programme, the introduction of trading specialists and stamp duty waivers for mid-cap stocks — will help to bring back retail participation.”

Lim attributes the low retail participation to initial public offerings (IPOs) that are not as exciting as before.

“The quality of the companies we had then and now is different … we had strong entrepreneurial companies back in the day, such as OYL Industries Bhd. Most of these companies have been taken private and that is one of the reasons why there has not been much retail interest.

“I think we need to attract quality companies to list in Malaysia, make IPOs look attractive and bring back retail interest.”

Now that the regulators have worked out measures to attract retail interest, perhaps the next step is to get quality IPOs, apart from those of government-linked companies.