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Marc Djandji, CFA is the Editor-in-Chief of The ASEAN Insider, a subscription-based monthly investment newsletter committed to finding compelling investments backed by powerful structural trends in Southeast Asia. He is also a co-Founder and Partner of ASEAN Strategy Group Ltd., an independent... More
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ASEAN Strategy Group
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ASEAN Investor Blog
  • Improving Trends With Short Term Headwinds Could Provide Good Entry Points For Long-Term Value 0 comments
    Mar 6, 2013 4:06 AM

    Venetian bankers began to trade in government securities in the 14th century. Bankers in Pisa, Verona, Genoa, and Florence followed suite. The Dutch East India Company began a sustained trade in company stock in Amsterdam. Within a few centuries, stock markets began popular in nations such as the United States, United Kingdom, Canada, China, and Malaysia. And that is where Bursa Malaysia is finding a niche.

    In 1930, it was known as the Malaysia Stockbrokers' Association. With the secession of Singapore from Malaysia in 1965, it became known as the Stock Exchange of Malaysia and Singapore. In 1973, currency interchangeability between Malaysia and Singapore ceased, and the Stock Exchange of Malaysia and Singapore was divided into the Kuala Lumpur Stock Exchange Berhad and the Stock Exchange of Singapore. The Kuala Lumpur Stock Exchange soon took over the operations of the Kuala Lumpur Stock Exchange. In 2004, it changed its name to Bursa Malaysia.

    Bursa Malaysia (1818.KL) is one of the largest stock markets in Asia, hosting just under 1,000 companies. It offers a large range of facilities from securities and derivatives to Islamic products. A fully integrated exchange, Bursa Malaysia is committed to providing the infrastructure needed to create a competitive stock market.

    The stock exchange has shown tremendous growth over the past 15 years, reflecting its resilience and tenacity throughout the various global and financial crisis. To be sure, Bursa Malaysia's average daily contract traded has grown by more than 9-fold in 15 years. Open interest grew by more than 1,100% to 199,173 contracts in 2012 compared to 17,345 contracts in 1997!

    In 2012, Bursa Malaysia facilitated three of the world's largest IPOs and was the fourth leading capital raising venue by country, coming after United States, China and Japan.

    Furthermore, ASEAN trading Link is now operational and brings together Singapore, Thailand and Malaysia. Through their local brokers, investors in Singapore and Thailand can now trade in Malaysia stocks.

    World leader in Shariah and Sukuk

    Yusli Mohamed Yusoff, Chief Executive Officer of Bursa Malaysia, whom I met at an investor conference in December and sparked my interest for the company, said: "Our expedient achievement is reflective of Malaysia's significance in the world of Islamic capital markets."

    Bursa Malaysia is becoming world leader in Shariah compliance. To achieve this, Bursa Malaysia's strategy involves listing of Sukuk (Islamic bonds). Issuers such as Khazanah Nasional Berhad, the Malaysian Sovereign Wealth Fund, Petroliam Nasional Bhd (Petronas), the Cagamas MBS Bhd (Cagamas MBS), and GE Capital have been attracted since first listing in August 2009. The Bursa Malaysia has now recorded a total of US$21.7 billion worth of Sukuk programs with 16 Sukuk listed by 14 issuers, from which three of them are foreign.

    Expanding capital market and recognition

    Bursa Malaysia's other significance lies with its global expansion program, which is targeting North America, Europe, and South-East Asian nations. It entered into a strategic partnership with Chicago Mercantile Exchange (NASDAQ:CME), which holds 25% of the equity stake in Bursa Malaysia Derivatives. Due to this and other measures, US clients can buy or sell on the market. This policy inspired the China Banking Regulatory Commission to give Bursa Malaysia QDII recognition as an investment destination for investors from China.

    Bursa Malaysia management is very bullish about innovation and the role of technology as an enabler. It expended ~US$6 million on capex in 2012, nearly all of which was allocated to information technology systems. In September 2012, Bursa Malaysia won the "Best Technology Innovation by an Asian Exchange" and runner up for "Asian Derivatives Exchange of the year" at the Futures & Options World for Asia Award ceremony.

    In July 2012, it introduced Options on Crude Oil Futures Contracts (OCPO) to complement its Crude Palm Oil Futures Contracts (FCPO). In August last year, the Bursa Malaysia initiated a dual licensing fast track program. It recently created a new asset class with the issuance of its exchange traded bonds, as well as replacing its existing market surveillance systems for its equity and derivatives markets with the Millennium Surveillance TM System. It announced the selection of NASDAQ OMX to power its securities market trading through NASDAQ OMX's industry leading technology, X-Stream INET.

    Key operating drivers in the securities market are as follows:

     

    FY2012

    FY2011

    FBM KLCI (points)

    1,688.95

    1,530.73

    Average daily trading value (OMT and DBT) (US$ million)

    540

    580

    Average daily trading volume (OMT and DBT) (billion)

    1.36

    1.34

    Effective clearing fee rate (basis points)

    2.29

    2.37

    Velocity (percent)

    28

    33

    Number of IPOs

    17

    28

    Number of new structured warrant listings

    551

    363

    Total funds raised:

      

    - IPOs (US$ billion)

    7.38

    2.14

    - Secondary issues (US$ billion)

    2.83

    2.67

    Market capitalisation at end of period (US$ billion)

    471.82

    413.50

    Source: Bursa Malaysia FY2012 Financial Statements (conversion at 0.3219 MYR/USD)

    Key operating drivers in the derivatives market are as follows:

     

    FY2012

    FY2011

    FCPO contracts (million)

    7.46

    5.87

    FKLI contracts (million)

    2.13

    2.48

    Other contracts (million)

    0.06

    0.10

    Total (million)

    9.65

    8.45

    Daily average contracts

    39,387

    34,474

    Daily average contracts

    171,518

    161,443

    Source: Bursa Malaysia FY2012 Financial Statements (conversion at 0.3219 MYR/USD)

    More numbers…

    In 2012, the Malaysian market had to contend with poor US corporate earnings, weaker growth in Asia, the Euro zone debt issue, the US budgetary deficit, political developments in the MENA region, and the generally weak outlook for the global economy. However, Bursa Malaysia's performance was resilient through the resurgence of private investments, strong commodity prices, as well as robust domestic consumption. This resilience has seen its securities benefiting from high trading interest. The volumes traded on Bursa Malaysia Derivatives (BMD) reached a daily historical high of 78,401 contracts on Monday, 29 October 2012, surpassing the previous record of 77,703 contracts on 16 May 2012.

    Bursa Malaysia registered a net profit of US$48.77 million for the financial year ended 31 December 2012, an increase of 4% from US$47.06 million reported in 2011.

    For 2012, market capitalization expanded 14%, to US$471.82 billion from the previous year's US$413.50 billion, and this is attributable to several sizeable IPOs on Bursa Malaysia, namely by Felda Global Ventures Holdings Berhad (Felda), IHH Healthcare Berhad (IHH) and Astro Malaysia Holdings Berhad (Astro).

    I like Bursa Malaysia given the country's economic prospects and business fundamentals. I believe Malaysia's strong domestic demand will continue to be the main driver of growth. Bursa Malaysia's strategic intent should encourage trading and help attract foreign investors by: 1) creating new tradable alternatives; 2) enhancing the trading environment; 3) reshaping market structures and framework; and 4) integrating into the regional marketplace which is the ASEAN Trading Link.

    In the short term, trading could remain muted as election nerves cloud sentiment. Investors may be tempted to stay on the sidelines due to perceived heightened political risk ahead of the 13th General Election, which could be held sometime before the end of April, and no later than June 27th this year. I think this could provide investors with good entry points on any pull backs.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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