Shares, shares everywhere but not enough to trade

 

Bursa Malaysia wants to adopt the FTSE global index standard to improve the market's quality; it remains to be seen whether this will work

Sometime in early 1991, the then executive chairman of the Kuala Lumpur Stock Exchange (now Bursa Malaysia) Datuk Mohd Azlan Hashim blasted constructors of the Morgan Stanley Capital International (MSCI) Index for cutting weightage on Malaysian stocks, on poor liquidity.

Azlan argued extensively, in general saying the MSCI's methodology in calculating free float of shares on Bursa Malaysia was flawed.

While it is not the only item they look for, international fund managers do observe the free float of shares closely when they make their investment decisions.

Quite simply, fund managers want to get in and out of a stock quickly.

In buying, they want the stocks to be available at the price and quantity they like. The converse is true when they want to sell.

At the time Azlan was making a case against the MSCI, a sizeable portion of stocks of blue chip companies on the exchange were held by government-linked entities. The quantum left as free float was not enough to excite international fund managers.

Many of the points raised by Azlan made sense, including one which said that the MSCI ought to take into account the phase of development in the Malaysian capital market, where government initiatives such as investment funds like the Employees' Provident Fund (EPF) and Permodalan Nasional Bhd (PNB) were needed.

That was then, and Azlan himself has since left the exchange and had ventured elsewhere.

But as recent as a week ago, Bursa Malaysia Bhd chief executive Datuk Yusli Mohd Yusof raised the same issue - the lack of free float on Bursa Malaysia.

Obviously, after almost a decade, Malaysia's capital market authorities have not been able to solve the problem.

Now Bursa Malaysia wants to adopt the FTSE global index standard to improve the market's quality. Known presently as the Kuala Lumpur Composite Index (KLCI), the market barometer will from July 6 this year be called FTSE Bursa Malaysia KLCI.

Apart from the obviously longer name, it remains to be seen whether or not this one will work towards improving liquidity in the market.

It may, to a certain extent, improve market velocity which ultimately measures liquidity. Bursa Malaysia at present has a velocity of about 30 per cent, which is considered low.

What would be more difficult to address will be to downsize the equity holdings of the state, to make shares more readily available for trading.

Some of the largest state-linked investors in Malaysia include the government's investment arm, Khazanah Nasional Bhd; PNB; EPF; pilgrims fund Tabung Haji and the armed forces fund, Lembaga Tabung Angkatan Tentera (LTAT).

Equities held by these entities are large. The government effectively owns more than 70 per cent of Sime Darby and about the same level of equity in Maybank. It also holds about 70 per cent of power company, Tenaga Nasional Bhd.

The EPF, especially, is not only bloated with local stocks but also government bonds.

Of course, no one can force the likes of PNB, EPF, Tabung Haji and LTAT to just stop investing in the local stock market. While linked to the government, these investment funds operate as private entities and are responsible for making money for their respective contributors.

But they can be encouraged or allowed to seek investments in other markets.

The government should also look into its equity holdings, whether direct or indirect, which it owns through entities such as Khazanah Nasional or the Minister of Finance Inc.

Is it necessary for Khazanah Nasional to be heavily invested in the local corporate sector? Or perhaps with its financial muscle, should it venture abroad more instead?

So quite obviously, there is no guarantee Yusli will solve the lack of free float of shares issue even with the stock exchange and benchmark index being called different names now, and after almost a decade of trying.

The government must join in to find a solution or the local stock market will remain unattractive.