06 JANUARY 2014
Malaysia: Asia’s Overlooked Emerging Market
By Shane Goh
In Singapore, the Straits Times Index started 2014 in a similar fashion to 2013 at 3181.62 points as a potential quantitative easing tapering comment by Ben Bernanke in May sent world markets spiralling south, erasing all gains achieved in the first five months of the year and condemned it into the negative territory.
However, across the causeway, the FTSE Bursa Malaysia EMAS Index (FBM EMAS) generated a positive 12.4 percent capital gain for 2013, compared to a negative 2 percent return in the FTSE ASEAN Index, bolstered by political stability after the conclusion of an election during the year. Over a longer horizon, the FBM EMAS Index has more than doubled over the past five years.
With 927 stocks, Bursa Malaysia, the nation’s stock exchange, can be divided into two segments: the Main Market and the ACE Market. The FBM EMAS Index tracks the share price performance of 254 constituent stocks, from the Main Market, with a total market capitalisation of RM1,446.1 billion as of 31 December 2013. The index returned a dividend yield of 2.8 percent last year.
The FBM EMAS Index is broken down to 10 industries with the financial sector commanding the lion share with 29.9 percent, led by Public Bank holding 7.7 percent of the index weightage.
Asia’s Overlooked Emerging Market
Malaysia’s economy has long been predominantly export-driven by electronics and commodities such as palm oil, crude oil and rubber. Over the past 10 years, Malaysia’s gross domestic product (GDP) has more than tripled, rising from US$100.8 billion in 2002 to US$303.5 billion in 2013. The burgeoning economy has not escaped the eyes of overseas investors as net inflows of foreign direct investment hit a record high of US$12 billion in 2011.
Additionally, the economic success with corporate bodies has trickled downstream as consumers’ spending power rose as well. The 2012 Household Income Survey found the average monthly income of Malaysian households increasing from RM4,025 in 2009 to RM5,000 in 2012, an increase of 7.2 percent per annum.
While higher income has encouraged a consumption spree, household debt to GDP has risen to 83 percent, compared with 70 percent in 2009. In order to tackle the steep debt levels, as well as reduce the nation’s fiscal deficit-to-GDP from 4 percent to 3.5 percent, the government introduced key measures in its 2014 budget. Notably, the plan includes raising property taxes to dent a swell in home prices and an upcoming replacement of its existing sales and services taxes with a 6 percent goods and services tax (GST) in April 2015.
In order to combat the potential price hike, the budget outlined a 1 percent to 3 percent reduction in income tax as well as other support measures planned for low-income families. Additionally, a list of exemptions for GST has been passed on essential items such as rice and cooking oil. Nonetheless, this could dampen demand on the luxury market as consumers rein in their expenditure.
Since plunging to its 15-year low against the Singapore dollar in September 2013, driven by a sell-off across emerging market assets, the Malaysian ringgit has been trading range-bound of RM2.50 to RM2.60 per Singapore dollar. A surge in household debts, Fitch Ratings’ cut of the nation’s credit outlook to negative from stable in July 2013 and potential capital flight from Malaysia’s bond market in favour of rising US Treasury yields triggered the fall.
However, “the ringgit is likely to be supported by Malaysia’s robust domestic growth, large current account surplus and manageable short-term external debt,” said Barclays in a 2013 report. An appreciation of the ringgit against the Singapore dollar could potentially inflate capital gains and dividends from stocks for local investors.
Leading The Charge
Shifting the spotlight back on equities, the top five performing segments in the FBM EMAS Index of 2013 comprised of Utilities, Technology, Basic Materials, Health Care and Consumer Services. Apart from Technology, we observe that the other sectors are defensive in nature. This could have been a conservative stance taken during the year with the election in mind.
Utilities, which makes up 7.7 percent of the index, posted the best result among the 10 industries, returning 28.6 percent last year with the Technology and Basic Materials sectors following closely behind.
With a favourable currency exchange rate and political stability for the upcoming four to five years, investors might want to turn their attention to companies within Asia’s overlooked emerging market.