Noting that 2011 saw no new additions to the
five ETFs listed on Bursa Malaysia, Uday Jayaram, its global head, securities
markets, is determined: “Bursa Malaysia will work to attract ETF listings this
year.”
Some 92
ETFs are listed on Singapore’s SGX while ETFs traded on Thailand’s stock
exchange (SET) more than doubled – from three to eight – last year, with the
addition of four ETFs tracking the gold price and one following high dividend
paying SET-listed stocks.
The
number of ETFs listed on Malaysia and Thailand’s stock exchanges is far higher
in turn than the two and none listed on Indonesia and Philippines’ stock
exchanges respectively.
Adikin
Basirun, director, Indonesia Stock Exchange, admits that the “volume is still
small” although he expects “to see volume grow over time and the market to
become ready to adopt ETFs”.
The
Philippine stock exchange (PSE) has seen no ETFs listed to date, although rules
governing the continuous issuance and redemption of shares are being amended to
make such listings possible.
“ETFs
are one of the fastest and largest growing asset classes,” offers PSE president
and CEO Hans Sicat. “We know there is a demand [for such products] and once
they are introduced [this year, they] should be a great driver of the
Philippine market.”
Broadening the investor base
Bursa
Malaysia is “supportive” of the listing in Hong Kong of ETFs on Malaysia’s
benchmark index, Jayaram said during a trip to Hong Kong for the launch of XIE
Shares’ range of ETFs on Hong Kong’s stock exchange in mid-February. He sees
such listings as a “promotion of the benchmark index, the FBMKLCI”, short for
FTSE Bursa Malaysia Kuala Lumpur Composite Index.
He
adds: “An ETF is the first point of entry for someone seeking to invest in
Malaysia. ETFs create visibility – investors put money in an ETF first and then
invest directly as familiarity increases. This is the normal flow.” In
addition, direct investors in stocks listed on Bursa Malaysia “go beyond the
top 30 stocks in the index to the 940 stocks listed” on the exchange.
In
Malaysia, despite institutional investors accounting for a relatively high
proportion of turnover (74% of last year), Jayaram believes that Hong
Kong-listed ETFs on Malaysia’s index will “bring in different groups of
investors” as they gain “traction with a new client segment”.
Further,
domestic institutional investors account for the bulk of trading on Bursa
Malaysia. Asian investors’ share of overseas institutional investors’ turnover
on Hong Kong’s stock exchange declined from 27% in 2009-2010 to 22% in
2010-2011. Overall, overseas institutional investors accounted for 42% of
market turnover in 2010-2011.
Another
development aimed at broadening the investor base is the Asean Trading Link,
which will see Bursa Malaysia and SGX connected in July 2012, with connectivity
extended to SET in August 2012.
These
three exchanges account for 70% of the market capitalization of equities traded
on the seven Asean exchanges which formalized future collaboration in April 2011.
The date for connectivity extending to the Hanoi, Ho Chi Minh, Indonesia and
Philippine stock exchanges has yet to be set.
The
Asean Exchanges initiative is aimed at boosting Asean as an asset class. The
CIMB FTSE Asean 40 ETF counts among the five ETFs with assets under management
(AUM) over US$100 million traded on the SGX, along with ETFs which track the
spot gold price, MSCI India, Singapore’s Straits Times index and a bond index.
First listed on the SGX in September 2006, the CIMB FTSE Asean 40 ETF was also
launched on Bursa Malaysia in July 2010.
Wider product range
“Investors’
knowledge base and avenues for trading are increasing,” explains Jayaram. “As
investors move away from plain-vanilla products, there is naturally an
ever-growing demand for a wider product range”. In addition to ETFs, more
exchange-traded derivatives are becoming available as well as other
exchange-traded products, such as real estate investment trusts (REITs).
While
Bursa Malaysia did not see any new ETFs listed last year, it did witness the
IPO of a major REIT. In December 2011, Pavilion REIT started trading on Bursa
Malaysia after raising 710.3 million ringgit (US$236 million) from its IPO.
In
March 2012, Thailand’s stock exchange witnessed its largest IPO in almost six
years with the 18.4 billion baht (US$602 million) Tesco Lotus Retail Growth
Freehold and Leasehold Property Fund IPO.
Just as
ETFs allow investors to track the returns on a basket of stocks (included in an
index), REITs effectively offer investors a cost-efficient way to earn the
yield on a basket of properties (owned by the same manager). In short, REITs
are similar to sector ETFs, directed towards the property market.
Yet
while it is possible to offer exchange-traded bundles of real estate located in
markets such as Malaysia, there are not enough auto companies, for example,
traded on Bursa Malaysia to offer Malaysia-focussed sector funds.
The
Asean Exchanges initiative witnessed the launch of Asean Stars last year, a
selection of the 30 biggest and most liquid stocks on each of the seven
exchanges included in the initiative. The 180 equities in total include three
auto and components stocks plus a further ten focussed on the broader
transportation sector. The sectors represented by the largest number of
companies include banks and investment services (35), food and beverages (21),
real estate (18), utilities (16) and energy (16).
One
sector which will see a marked rise in representation this year is the
healthcare sector. The second quarter of 2012 is set to see the listing of a
US$400 million business trust – Fortis Healthcare (India) – on SGX while
Khazanah Nasional has indicated a second half 2012 primary listing on Bursa
Malaysia, and secondary listing on SGX, for Integrated Healthcare Holdings
(IHI). The IPO is set to bring in over 9.24 billion ringgit, marking the
country’s largest IPO since Petronas Chemicals took in 12.6 billion ringgit in
November 2010 and exceeding the total 6.7 billion ringgit raised from 11 IPOs
in 2011. Malaysia saw 29 IPOs (raising 19.9 billion ringgit) in 2010 and 14
(raising 12.04 billion ringgit) in 2009.
GLC transformation gathers pace
Launched
in 2004, the government-linked companies (GLC) transformation programme is
shifting into high gear this year, which also sees a general election in
Malaysia. In July 2011, 33 GLCs were identified as being ready for divestment,
including seven to be listed, 21 to be sold directly through a bidding process
and five set to see a reduction in government equity ownership. Malaysia’s
government owns 40% on average of top 100 stocks in the FBMKLCI contributing to
relatively low levels of liquidity.
Following
the listing of Petronas Chemicals in 2010 and MSM Malaysia Holdings in 2011,
this year will see the listing of Felda Global Ventures Holdings as well as
IHI. Already, progress has been made with Khazanah Nasional’s sale of its 42.7%
stake in car-maker Proton to DRB-Hicom for 1.29 billion ringgit, scheduled to
close in March 2012.
Along
with GLCs such as Malaysia Airlines and Tenaga Nasional, Proton faces
uncertainty surrounding rising input costs in an environment of higher oil
prices. More broadly, as Asia’s only large net exporter of oil, Malaysia is one
of the Asian economies least affected by rising oil prices. “Given the very
small weighting of energy stocks, market performance is not necessarily strong
during periods of non-demand-driven high oil prices,” cautions a March 1 Nomura
report.
CLSA
highlights the broader appeal of Asean in a recent research report. Head of
thematic research, Amar Gill, notes that the region is in a “sweet spot” as
rising foreign direct investment – with Singapore, Indonesia and Malaysia
seeing the sharpest rises – spurs an increase in manufacturing jobs, at far
higher wages than those available in the agricultural sector.
Amid a
weak global economic recovery, Asean is well positioned to benefit says Gill,
as China and India grapple respectively with a labour crunch and a “regulatory
quagmire”.
The
broker sees a sharp rise in consumer spending, estimating a US$3,000 threshold
at which “growth in the middle class becomes non-linear”. Malaysia’s median
disposable income is estimated at US$3,400 compared to a US$1,300-US$2,500
range in Indonesia, the Philippines and Thailand, highlighting the potential
for companies to build out their franchises.
In
particular, Gill sees potential for the Asean Trading Link to drive M&A
activity among financial service providers.
One
example is the negotiations between RHB Capital and OSK Holdings – ongoing
since October 2011 – to create Malaysia’s largest stockbroker.
Consolidation
should benefit the development of the ETF market, long held back by limited
incentives to promote products that risk a reduction in brokerage revenue from
lower single stock turnover and a decline in sales of higher margin mutual
funds. Asean’s march towards deeper integration has increased the allure of
increasing efficiency.
Oliver
Jones
Business & Investment Opportunities
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