July has been a turbulent month for the country's stock exchange, Bursa Malaysia, amidst a difficult year so far. While good news has been in short supply lately, a recovery is looking more likely, given a broadly positive medium-term outlook.
On July 16, Malaysian stocks dropped following news that opposition leader Anwar Ibrahim had been arrested. The fall was another small but troubling blow to the market in a difficult month for the Bursa Malaysia. The Kuala Lumpur Composite Index (KLCI), widely considered to be the capital market barometer, fell some 8.18 points or 0.7% to 1119.42. The FTSE Bursa Malaysia Large 30 index (which includes the 30 companies with the largest market capitalisation) dropped 62.72 points, or 0.9%, to 7212.13 as large caps and blue chips led the fall. Overall, of the 802 stocks traded, 357 fell, 217 gained and 228 remained unchanged, while the volume traded was an unusually low 315m shares.
Political uncertainties regarding the future of Prime Minister Abdullah Ahmad Badawi and Ibrahim, a revised growth outlook and disappointing second quarter profits for Bursa Malaysia combined to produce the downturn for the country's generally lively capital market.
The exchange rallied a little on July 17 as investors hunted for bargains and news of a rally on Wall Street encouraged optimism. The KLCI gained 0.2% to close at 1121.17 while the 30 Large edged forward 0.1% to 7222.25. Advancers marginally outnumbered decliners by 268 to 240, with 253 stocks flatlining and 614 untraded.
Nonetheless, gains were limited, and the immediate outlook remains subdued. This is partly due to the political situation, but more importantly linked to the expectation that half a percentage point may be trimmed from Malaysia's expected gross domestic product (GDP) growth this year by recent domestic fuel price rises, coupled with the global economic slowdown. The central bank's forecast of inflation hitting a 10-year high of 4.2% in 2008 may also have spooked investors.
Yet economic concerns are real. "The Malaysian equity market remained lacklustre during the first half [of the year], being continually challenged by the slowing US and global economy, rising crude oil, commodity and food prices, and domestic uncertainties," a statement issued by Bursa Malaysia said. A note by investment bank Aseambankers admitted that "the KLCI is still on a strong bearish trend".
Bursa Malaysia, the firm which operates the stock exchange, has suffered from the recent market uncertainties. The company announced on July 17 that its net profit for the second quarter was 56% down on the same period last year, totalling only $8.87m.
To compound matters, the performance of recent IPOs (initial public offerings) has been quite poor. Of the 14 new IPOs since the start of the year, 11 had seen their stocks fall by the beginning of July, and all these by more than 10%. TFP Solutions, a business productivity solutions firm which debuted on February 22, has slipped from 32 sen per share to 12.5 - a drop of more than 60%. Rubber company Hartalega Holdings closed at RM1.51 at the start of the month, 16% down on its RM1.80 offer price in April, while Luxchem Corp lost 37% of its value in the few days from its June 27 launch to close at 69 sen.
These falls have been caused in large part by the market's bearish trend, but fears may also be raised about stock overvaluation. Given the isolated incidents of manipulated reportage to the exchange in the past, this may cause further jitters in the investment community.
Despite a bearish last few months - and particularly trying recent weeks - Malaysia's capital markets look robust enough to weather the storm. According to Nasaruddin Arshad, group economist at Public Bank who was quoted in the local press, the national economy is strong, with high levels of savings, and the authorities have the capacity to use fiscal and monetary stimulus should growth slow. The solid macroeconomic outlook - with growth expected to be around 5% over the next two years - should reassure long-term investors in the Bursa. It should also be noted that Malaysia's stock exchange has outperformed neighbours such as China and Vietnam, whose stock market has lost half of its value so far this year.
Furthermore, with the government looking to expand the country's road, rail and utilities infrastructure over the next few years, a range of locally-listed companies will be increasingly attractive investments. Several may turn to the capital market as a source of funding, and the possibility of bond issues would boost another side of the market. While initial estimates by the Securities Commission of a $150bn outlay on infrastructure may be revised due to rising commodity costs, a wealth of opportunities remain.