Bursa rides trad­ing wave

Stock ex­change CEO Datuk Muhamad Umar Swift speaks on the mar­ket’s ir­ra­tional ex­u­ber­ance.

The Star Malaysia - StarBiz - - Front Page - By GURMEET KAUR gurmeet@thes­tar.com.my

THE spec­tac­u­lar per­for­mance of the lo­cal stock mar­ket, notwith­stand­ing the on­go­ing eco­nomic slow­down, is one of the hottest top­ics of the day.

Who would have thought that shares on Bursa Malaysia would hit new records in trad­ing val­ues at a time when a deadly pan­demic was at­tack­ing the world.

Stocks, though, have ral­lied about one-fifth off the March 19 low with Bursa Malaysia scor­ing a record-high vol­ume at 11.21 bil­lion se­cu­ri­ties on Mon­day.

One big ben­e­fi­ciary to this phe­nom­e­non is the lo­cal ex­change it­self. Bursa Malaysia Bhd’s share price has climbed by a mas­sive 70% over the last two months, adding some Rm2.65bil in mar­ket cap­i­tal­i­sa­tion to close up 5 sen at RM7.80 yes­ter­day.

More trad­ing sim­ply means more fees for the ex­change to col­lect.

But it still seems un­fath­omable on why there is so much money flow­ing into the stock mar­ket when busi­nesses are haem­or­rhag­ing due to the pan­demic. True there are sec­tors such as rub­ber glove mak­ers which are see­ing spec­tac­u­lar re­sults but many other com­pa­nies claim­ing to ben­e­fit from the pan­demic may not nec­es­sar­ily re­port stel­lar earn­ings.

Bursa Malaysia’s chief ex­ec­u­tive of­fi­cer Datuk Muhamad Umar Swift says the vol­umes in the mar­ket are driven by lo­cal in­sti­tu­tional in­vestors, who have been col­lect­ing fol­low­ing dis­pos­als by for­eign in­vestors. Mean­while, re­tail in­vestor par­tic­i­pa­tion con­tin­ues to post record-high num­bers as in­ter­est in penny stocks in­creased sig­nif­i­cantly, he tells Starbizwee­k.

In­ter­est­ingly, in March when the move­ment con­trol or­der (MCO) was im­ple­mented, the to­tal in­dus­try regis­tered an in­crease of 184% in new ac­counts com­pared with March 2019.

Volatil­ity is good for busi­ness

Hong Leong In­vest­ment Bank (HLIB) Re­search in a May 18 re­port said the lo­cal ex­change’s year-to-date (YTD) av­er­age daily vol­ume (ADV) of Rm2.6bil looked “like it could trump the highs of 2017 (Rm2.3bil) and 2018 (Rm2.4bil). A con­se­quence of this is record earn­ings could be in the off­ing for the ex­change, says the re­search firm.

“With that, it wouldn’t be too far­fetched to en­vi­sion Bursa Malaysia’s price to earn­ings re-rat­ing to its pre­vi­ous highs of more than 30 times, which was last seen in the third and fourth quar­ter of FY18,” adds HLIB, which sees Bursa Malaysia ben­e­fit­ing via ro­bust ADV stem­ming from mar­ket volatil­ity. The re­search firm ex­pects a W-shaped tra­jec­tory for the lo­cal mar­ket which in­tu­itively au­gurs well for ADV via height­ened trad­ing.

The higher re­tail par­tic­i­pa­tion in eq­ui­ties, ac­cord­ing to HLIB, is pos­i­tive for Bursa as it should re­sult to higher over­all im­plied rate earned on eq­ui­ties given the clear­ing fee (0.03%) cap at RM1,000.

How­ever, there is also a con­cern that some level of “hot” money has come into the lo­cal mar­ket.

If so, what is the source of these funds? Are they from any form of ill-got­ten gains? All money com­ing into the stock mar­ket does go through ver­i­fi­ca­tion through a sys­tem called KYC or know your cus­tomer, ex­plains Umar.

To be sure, there is po­ten­tially more volatil­ity to come as in­vestors re­assess the full im­pact of Covid-19 to the econ­omy and cor­po­rate earn­ings. This should ben­e­fit Bursa Malaysia, es­pe­cially its trad­ing rev­enue, ac­cord­ing to an­a­lysts.

If Bloomberg data is any­thing to go by, re­search firms fore­sees Bursa ben­e­fit­ing post-pan­demic too, as ADV sus­tains on an even­tual mar­ket re­cov­ery. There are ten buy calls on the stock, while four firms keep a hold and two have a sell rat­ing.

“Volatil­ity is good for its busi­ness and Bursa is seen as be­ing one of the very few listed com­pa­nies that’s able to de­liver strong earn­ings growth amidst Covid-19,” says one an­a­lyst.

For the first quar­ter ended March 31, Bursa Malaysia’s net profit rose 38% to Rm64.73mil on the back of Rm150.75mil rev­enue.

On its part, Umar says the ex­change will con­tinue to broaden its of­fer­ings to bet­ter serve the needs of the cap­i­tal mar­ket and econ­omy. Go­ing for­ward, he says there is am­ple room for growth in the de­riv­a­tives mar­ket con­sid­er­ing that Malaysia con­tin­ues to have a strong pres­ence in palm oil-based in­dus­tries.

What ad­vice would he give re­tail in­vestors, who have been flock­ing into shares in droves?

Umar says in­vestor ed­u­ca­tion has al­ways been a crit­i­cal com­po­nent of the ex­change’s strat­egy in grow­ing its re­tail base.

“But ul­ti­mately, the best form of in­vestor pro­tec­tion is achieved through in­vestor em­pow­er­ment – hav­ing the abil­ity to ask the right ques­tions and make in­formed de­ci­sions,” he says.

Ex­cerpts:

SBW: There has been a fair bit of heavy vol­umes into the lo­cal mar­ket. Where is this liq­uid­ity com­ing from?

Umar: As for­eign in­vestors dis­posed of Malaysian eq­ui­ties due to the pan­demic and global eco­nomic un­cer­tain­ties, our lo­cal in­sti­tu­tional in­vestors have been col­lect­ing while re­tail in­vestor par­tic­i­pa­tion con­tin­ues to post record-high num­bers as in­ter­est in penny stocks in­creased sig­nif­i­cantly.

As at end-april 2020, both lo­cal in­sti­tu­tional and lo­cal re­tail in­vestors were net buy­ers at Rm6.43bil and Rm4.03bil re­spec­tively.

It is also worth high­light­ing that re­tail par­tic­i­pa­tion has in­creased in re­cent years. In 2019, re­tail par­tic­i­pa­tion grew to 24.5% of the to­tal mar­ket value traded, the high­est level in the last five years.

We con­tinue to see pos­i­tive de­vel­op­ments this year:

> The ex­change saw a 96% in­crease in ac­counts opened in Jan­uary to March 2020 visa-vis the same pe­riod last year.

> In March 2020, when the MCO was im­ple­mented, the to­tal in­dus­try regis­tered an in­crease of 184% in new ac­counts opened ver­sus March 2019 (ex­clud­ing Rakuten ac­counts opened).

> In terms of trad­ing ac­tiv­ity among re­tail­ers, March 2020 regis­tered a 49% in­crease in ADV com­pared to 2019 ADV. Re­tail­ers were net buy­ers at Rm2.89bil YTD.

These de­vel­op­ments sug­gest that re­tail traders are be­com­ing more well-in­formed and will­ing to seek out op­por­tu­ni­ties in stocks that they deem are un­der­val­ued.

On­line trad­ing, which is of­fered by most re­tail bro­kers, has also helped con­trib­ute to an in­crease in re­tail trad­ing par­tic­i­pa­tion.

What lev­els of “know you cus­tomers” or KYC are be­ing done on these funds com­ing into the stock mar­ket? As­sum­ing it is a US dol­lar fund from abroad, does Bursa Malaysia or our lo­cal bro­ker­ages con­duct KYC on such monies?

Rel­e­vant KYC poli­cies and pro­ce­dures are in place. Mar­ket in­ter­me­di­aries, i.e. par­tic­i­pat­ing or­gan­i­sa­tions/bro­kers per­form KYC on in­vestors that come into the mar­ket.

New records are be­ing bro­ken in terms of vol­umes? How sig­nif­i­cant will this be for Bursa Malaysia’s earn­ings?

Trad­ing is one of the key rev­enue con­trib­u­tors for Bursa Malaysia. Se­cu­ri­ties trad­ing ac­counted for 48% of Bursa’s op­er­at­ing rev­enue for 2019. As such, strong trad­ing ac­tiv­i­ties can con­trib­ute pos­i­tively to our fi­nan­cial per­for­mance.

That said, trad­ing vol­ume can be sub­ject to shifts in mar­ket sen­ti­ments, which are in­flu­enced by a myr­iad of fac­tors. Changes in eco­nomic out­look, cor­po­rate earn­ings and risk ap­petite are among the many con­tribut­ing fac­tors.

How sus­tain­able are the in­creases in trad­ing vol­umes? What are some other in­di­ca­tors to look at be­sides vol­umes, to judge whether the mar­ket is healthy and vi­brant?

As men­tioned ear­lier, trad­ing vol­ume can be sub­ject to shifts in mar­ket sen­ti­ments, which are in­flu­enced by many fac­tors.

The per­for­mance of the bench­mark in­dices, i.e. the FBM KLCI, is one of an in­di­ca­tion of mar­ket sen­ti­ment.

Cur­rently, the FBM KLCI has re­bounded by more than 15% from its low of 1,219 points on March 19, 2020 while trad­ing ve­loc­ity stood at 43% com­pared to 28% in 2019.

Be­sides trad­ing vol­ume, we also gauge the vi­brancy of the mar­ket by look­ing at mar­ket ve­loc­ity through a re­view of the trad­ing value against the mar­ket cap. An­other in­di­ca­tor that we use to gauge the mar­ket’s vi­brancy is the num­ber of IPOS.

We be­lieve our re­tail in­vestor out­reach ini­tia­tives have been grad­u­ally bear­ing fruit. It is a slow but sure jour­ney. We will con­tinue to en­hance ef­forts to boost fi­nan­cial lit­er­acy to build a knowl­edge­able re­tail seg­ment and en­sure a sus­tain­able mar­ket­place in the longterm.

Have the high vol­umes started to at­tract for­eign funds? Our illiq­uid na­ture was one of the rea­sons cited as to why for­eign in­vestors seem to shun our mar­ket be­fore.

While higher vol­umes may in­di­cate bet­ter liq­uid­ity, the broader macro-eco­nomic and geopo­lit­i­cal fac­tors have re­sulted in a global risk-off sen­ti­ment with in­vestors mov­ing out of eq­ui­ties into other safer as­set classes. This has spurred higher for­eign out­flows from Malaysian eq­ui­ties, a phe­nom­e­non that is not unique to Malaysia only but also ex­pe­ri­enced by all the emerg­ing mar­kets in Asean. Re­gard­less of the mar­ket con­di­tion, Bursa Malaysia has main­tained the con­ti­nu­ity of its ini­tia­tives to en­sure un­in­ter­rupted mar­ket ac­cess as well as pro­mote the mar­ket­place through var­i­ous pro­grams and chan­nels.

We fa­cil­i­tate cor­po­rate ac­cess and sec­to­rial ini­tia­tives via sem­i­nars and we­bi­nars in col­lab­o­ra­tion with our bro­ker part­ners. These ini­tia­tives can help keep for­eign fund man­agers abreast with the lat­est up­dates on listed com­pa­nies as well as a view on mar­ket out­look to take ad­van­tage of in­vest­ment op­por­tu­ni­ties in our mar­ket.

The ini­tia­tives above are fur­ther sup­ple­mented by the steps taken to align the Ex­change to­wards be­com­ing a de­vel­oped and global av­enue for fundrais­ing and in­vest­ing. Ex­am­ples of mea­sures im­ple­mented in­clude:

> Mi­gra­tion to a two-day set­tle­ment cy­cle (T+2) from a three-day cy­cle (T+3).

> Ex­panded in trad­ing fea­tures to en­able a

“But ul­ti­mately, the best form of in­vestor pro­tec­tion is achieved through in­vestor em­pow­er­ment – hav­ing the abil­ity to ask the right ques­tions and make in­formed de­ci­sions.” Datuk Muhamad Umar Swift

greater va­ri­ety of trad­ing strate­gies. This in­cludes Mar­ket Or­der at Pre-clos­ing, On-open Or­der, On-close Or­der, Ice­berg Or­der as well as One-can­cel-other Or­der.

These en­hance­ments can help boost mar­ket ac­cess and trad­ing ef­fi­ciency for a broad range of par­tic­i­pants, es­pe­cially for­eign in­vestors across vary­ing time zones.

On ex­pand­ing the ex­change’s in­come stream with IPO pipe­lines seen to be slow­ing due to Covid-19?

In­evitably, near-term IPO pipe­lines are ex­pected to be af­fected by Covid-19. Some com­pa­nies that are ready to list may de­cide to “wait-and-see” and de­fer their list­ing plan in an­tic­i­pa­tion of greater cer­tainty over de­mand and share price per­for­mance.

Nev­er­the­less, we will con­tinue to en­gage with po­ten­tial is­suers ac­tively and to sup­port cap­i­tal rais­ing ac­tiv­i­ties dur­ing such test­ing times. Bursa has in­tro­duced a se­ries of mea­sures, such as the waiver of all list­ing-re­lated fees.

Bursa is well com­mit­ted to con­tinue broad­en­ing of of­fer­ings to bet­ter serve the needs of the cap­i­tal mar­ket and econ­omy – in terms of fundrais­ing, wealth cre­ation and risk man­age­ment. This sup­ports our in­come di­ver­si­fi­ca­tion. For ex­am­ple, we are ex­plor­ing op­por­tu­ni­ties with sev­eral po­ten­tial part­ners to ex­pand our data of­fer­ings.

Ini­tia­tives to di­ver­sify our rev­enue streams range from short-term quick wins to long-term ef­forts that will be cov­ered as part of Bursa’s mid-term strate­gic roadmap for 2021 and be­yond.

How is Bursa Malaysia, the listed or­gan­i­sa­tion, weath­er­ing the pan­demic?

Bursa is a high op­er­at­ing lever­age busi­ness, where a high pro­por­tion of our costs are fixed (fixed cost: 70%, vari­able: 30%).

Given the con­tin­ued un­cer­tainty over the global pan­demic and chal­leng­ing op­er­at­ing en­vi­ron­ment, we have re­viewed our ac­tiv­i­ties and un­der­taken cer­tain cost con­trol mea­sures. We are tak­ing a pru­dent view of our ex­pen­di­ture, and we had also em­barked on sev­eral Busi­ness Process Im­prove­ment ini­tia­tives in­ter­nally to make our or­gan­i­sa­tion more ef­fi­cient. How­ever, we will not sac­ri­fice any short term gain over long term ben­e­fits. All the de­vel­op­men­tal work in­volv­ing cap­i­tal ex­pen­di­ture to im­prove mar­ket com­pet­i­tive­ness and vi­brancy will con­tinue re­gard­less.

Ad­vice to re­tail in­vestors con­sid­er­ing we no­tice there is a de­cou­pling in terms of mar­ket per­for­mance and the real econ­omy?

In­vestor ed­u­ca­tion has al­ways been a crit­i­cal com­po­nent of our strat­egy in grow­ing our re­tail base. We are com­mit­ted to en­sur­ing that in­vestors trade in an in­formed man­ner. Our ef­forts in build­ing in­vestor pro­tec­tion are fo­cused on three ar­eas, namely, strength­en­ing cor­po­rate gov­er­nance, board ef­fec­tive­ness and in­vestor ed­u­ca­tion.

Ul­ti­mately, the best form of in­vestor pro­tec­tion is achieved through in­vestor em­pow­er­ment - hav­ing the abil­ity to ask the right ques­tions and make in­formed de­ci­sions. Over the years, we have con­ducted nu­mer­ous ed­u­ca­tional pro­grams, through phys­i­cal and on­line plat­forms, to ed­u­cate the Malaysian pub­lic about stock in­vest­ments.

How is Bursa po­si­tion­ing it­self vis-à-vis other stock ex­change’s around the re­gion? Where do you see Bursa Malaysia’s prospects and value propo­si­tion?

In or­der to en­hance our com­pet­i­tive­ness in the re­gion, we are fo­cus­ing on the fol­low­ing 3 ar­eas.

Firstly, Bursa Malaysia has strong lead­er­ship in the Is­lamic cap­i­tal mar­ket with a strong po­ten­tial to grow fur­ther. Ap­prox­i­mately 77% of our listed stocks are Shariah-com­pli­ant, and al­most 40% of our ETFS are Shariah-com­pli­ant.

We also plan to ex­pand Bursa Suq al-sila, our global Shariah-com­pli­ant com­mod­ity trad­ing plat­form, into new re­gions.

We be­lieve the shift to­wards eth­i­cal or value-based in­vest­ing in­ter­na­tion­ally also au­gurs well for Bursa Malaysia’s prospects. The con­ver­gence of sus­tain­abil­ity, re­spon­si­ble in­vest­ing and Shariah in­vest­ing, is ex­pected to deepen our com­pet­i­tive edge and make our of­fer­ings highly rel­e­vant to in­vestors around the globe.

Se­condly, there is am­ple room for growth in the de­riv­a­tives mar­ket. Malaysia con­tin­ues to have a strong

pres­ence in palm oil-based in­dus­tries. Our lead­er­ship in the palm oil suite of cap­i­tal mar­ket of­fer­ings is, amongst oth­ers, a po­ten­tial strong growth cat­a­lyst.

We are in dis­cus­sion with sev­eral po­ten­tial strate­gic part­ners to fur­ther strengthen our global ac­ces­si­bil­ity, es­pe­cially into Greater China. We are also ex­plor­ing new ser­vices, in­clud­ing night trad­ing for de­riv­a­tives to en­able trade ac­tiv­i­ties out­side our reg­u­lar trad­ing hours. Widen­ing our breadth of de­riv­a­tives prod­ucts will also make our of­fer­ings more rel­e­vant. For ex­am­ple, we

are work­ing in con­cert with reg­u­la­tors to in­tro­duce phys­i­cal set­tle­ment of MGS fu­tures by Septem­ber 2020, with the view to of­fer a more ef­fec­tive hedg­ing plat­form for in­vestors.

Thirdly, we are look­ing at strate­gic part­ner­ships and col­lab­o­ra­tions to build upon these unique value propo­si­tions that will help shape Bursa’s fu­ture growth

Progress on the es­tab­lish­ment of a wholly-owned sub­sidiary to as­sume the reg­u­la­tory func­tions cur­rently un­der­taken by Bursa Malaysia.

The Se­cu­ri­ties Com­mis­sion (SC) and Bursa Malaysia have been work­ing closely to fur­ther en­hance the gov­er­nance struc­ture of the ex­change by seg­re­gat­ing its reg­u­la­tory func­tions from its com­mer­cial ob­jec­tives to ad­dress per­cep­tion of po­ten­tial con­flicts of in­ter­est be­tween these two roles. On Fe­bru­ary 25 2020, the SC and Bursa an­nounced that Bursa Malaysia would es­tab­lish a wholly-owned sub­sidiary (Bursa Regsub) to as­sume the reg­u­la­tory func­tions cur­rently un­der­taken by Bursa Malaysia.

Sev­eral work­streams have been es­tab­lished to fi­nalise the im­ple­men­ta­tion de­tails, with the view to en­sure a seam­less tran­si­tion of the ex­change’s reg­u­la­tory func­tions to the sub­sidiary. We are work­ing to­wards op­er­a­tional­is­ing the Bursa Regsub by the end of 2020.

Ul­ti­mately, we aim to cre­ate a for­ward-look­ing and well-reg­u­lated Malaysian cap­i­tal mar­ket to en­sure our con­tin­ued vi­brance and com­pet­i­tive­ness on a global scale.

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