History of Stock Market in Malaysia

August 4, 2017 | Author: Shahira Khairudin | Category: Stock Market, Stocks, Financial Economics, Financial Markets, Market (Economics)
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HISTORY OF STOCK MARKET IN MALAYSIA The stock exchange provides investors the market place and facilities for the buying and selling of their stocks and shares. The Bursa Malaysia, like other stock exchanges, was established to meet two basic and complementary needs: businesses need for funds and an individual or company’s desire to invest savings efficiently (Ho, Niden, & Johneny, 2011). The Bursa Malaysia is one of the important members of the global stock markets. In 1960, a Malaysian stock exchange market has been established and in this market both Malaysia and Singapore traded under currency interchangeable agreement. In 1973 the exchange split into Kuala Lumpur stock exchange board and stock exchange of Singapore. The KLSEB has been renamed the Kuala Lumpur stock exchange. Again in 2004 the KLSE was renamed to Bursa Malaysia Berhad. In year 2007 the Bursa Malaysia had a market capitalization of US$189 billion and in the same year the main index had a market capitalization of US$ 307 billion which is called as Kuala Lumpur composite index (KLCI). It has divide the listed companies according to his size and growth like the high growth companies listed in the MESDAQ market, the large size companies listed in the Bursa Malaysia securities main board and the medium size companies listed in second board (The stock exchange of Malaysia). Bursa Malaysia today is one of the largest bourses in ASEAN, hosting more than 900 companies across 60 economic activities. It operates a fully integrated exchange, offering a comprehensive range of exchange-related facilities including listing, trading, clearing, settlement and depository services. It also has a diverse range of offerings


covering equities, derivatives and Islamic products and bonds as well as an offshore financial exchange. One of the key Entry Point Projects (“EPP”) identified to drive the Financial Services National Key Economic Area under the Economic Transformation Programme is Revitalising Malaysia’s Equity Markets, aiming at increasing Bursa Malaysia’s market capitalisation to RM3.9 trillion by 2020 from RM1.0 trillion in 2010, creating 8,598 jobs by 2020 and improving trading velocity from 31% of total market capitalisation to 60% in line with regional averages (Corporate Sustainability Statement, 2015).

WHAT IS EQUITY MARKET? The equity market (often referred to as the stock market) is the market for trading equity instruments. Stocks are securities that are a claim on the earnings and assets of a corporation. An example of an equity instrument would be common stock shares, such as those traded on the stock exchange. This is called Initial Public Offer (IPO). More such issues in future are called Follow-on Public Offer (FPO). The stock market is equally important for economic activity because it affects both investment spending and consumer spending decisions. The price of shares determines the amount of funds that a firm can raise by selling newly issued stock. That, in turn, will determine the amount of capital goods this firm can acquire and, ultimately, the volume of the firm’s production (Dr Econ, What are the differences between debt and equity markets?).


Investing in stocks has consistently proven to be one of the most profitable forms of investment available (Why Invest In Stocks?). In the equity market, investors bid for stocks by offering a certain price, and sellers ask for a specific price. When these two prices match, a sale occurs. Often, there are many investors bidding on the same stock. When this occurs, the first investor to place the bid is the first to get the stock. When a buyer will pay any price for the stock, he or she is buying at market value; similarly, when a seller will take any price for the stock, he or she is selling at market value. Companies sell stocks in order to get capital to grow their businesses. When a company offers stocks on the market, it means the company is publicly traded, and each stock represents a piece of ownership. This appeals to investors, and when a company does well, its investors are rewarded as the value of their stocks rise. The risk comes when a company is not doing well, and its stock value may fall. Stocks can be bought and sold easily and quickly, and the activity surrounding a certain stock impacts its value. For example, when there is high demand to invest in the company, the price of the stock tends to rise, and when many investors want to sell their stocks, the value goes down (Equity Market Definition). Every company with a publicly traded stock is competing with other companies for the investors’ dollars. The competition is won not just by being a better company that helps of course – but by being a company that is better known, better understood and has done a better job of building investors’ confidence (Ho, Niden, & Johneny, 2011).


EQUITY MARKET AND ECONOMY In general, rising stock prices for companies from a particular country indicate a healthy, growing market; on the other hand, a downward trend in stocks may reflect weakening fundamentals in a country's economy. This is because rising prices tend to indicate that many buyers are investing their money in the future health and growth of the economy as a whole. In the United States, two periods of economic decline were linked to a crash in equity markets: the Great Depression of 1929 and the Great Recession of the late 2000s. The Great Depression resulted from widespread panic and distrust in the market; people preferred to hide money under their mattresses than hold it in the banks, which caused chaos in the trading world. The Great Recession, which affected the global market, not just the United States, resulted from a crash in the housing market and an over-reliance on credit (Equity Market). Asian equity markets have grown significantly in size since the early 1990s, driven by strong international investor inflows, growing regional financial integration, capital account liberalization, and structural improvements to markets. Asia’s capitalization has more than doubled in U.S. dollar terms to $13.7 trillion, 30 percent of world capitalization. Markets in some other countries, such as Malaysia, and Taiwan Province of China, are also sizable. The development of equity markets provides a more diversified set of channels for financial intermediation to support growth, thus bolstering medium-term financial stability. At the same time, as highlighted by the May–June 2006 market corrections, the increasing role of stock markets potentially changes the nature of macroeconomic and 4

financial stability risks, as well as the policy requirements for dealing with these risks (Purfield, Oura, Kramer, & Jobst, 2006).

EQUITY MARKET IN MALAYSIA Stock market, which offers to sell, purchases or exchange of securities was the most active component of the capital market in Malaysia since the 1960s (Tuyon & Ahmad, 2016). Domestic stock market experiencing four crashes, that are in 1973, 1981, 1987 and the devastating 1997. Each survival from the previous crash made the stock market stronger and more matured, and finally led to the establishment of the Securities Commission (SC) in 1993, a statutory body empowered to supervising all the public companies in Malaysia. This had exhibited the commitment of the Malaysian Government in stabilizing and promoting a healthier domestic financial system. From an economic viewpoint, the Malaysian economy could be seen as a “finance-led” growth economy, with the growth of the finance sector especially the stock market, assisting or even creating the momentum of the economic growth. The stock market is seen to be acting the role of allocating resources in efficient manners which would then spur growth (Zheng, 2007). The equity market saw its growth accelerate over the 1990s. The Second Board, which was launched in 1988, picked up greater momentum over the subsequent few years, thanks largely to the dramatic increase in liquidity during the “super bull-run” of 1993–94 and the Second Board run-up in 1996. At the 5

same time, the listing of several major privatised companies played a major role in the surge in the overall market capitalisation of the KLSE from RM132 billion in 1990 to RM807 billion in 1996, an increase of over 500% in six years. This made the KLSE the third largest bourse in the Asia-Pacific (ex-Japan) after Hong Kong and Australia at the time (Trends and Challenges). In 2010, Malaysia’s equity market continues to be a safe haven due to its relatively low volatility and reasonable returns reflecting the maturity of the capital markets. Improved investor sentiment is likely to be sustained on Malaysia’s long-term growth prospects given the government’s commitment to economic and policy reforms (Quarterly news bulletin of the Securities Commission Malaysia, 2010). Malaysia has a population of around 30 million people, a literacy rate hovering around 95%, and is Southeast Asia's third-largest economy. Foreign investment has steadily risen throughout 2015, with the most popular sectors for inbound investment being manufacturing, mining & quarrying and services. The biggest deals by value occurred in the petroleum products, electronics & electrical products and non-metallic mineral products markets. Malaysia presents many investment opportunities for foreign investors including private equity houses, now being a particularly opportune time to invest given the weakness of the Malaysian ringgit. Malaysia has set its sights high in aiming to attain developed-nation status by 2020, which it hopes to achieve by attracting US$444 billion private investment between 2010 and 2020. Despite of the investment opportunities for foreign investor in Malaysia, they are obliged to few restrictions. Foreign investors are permitted to hold 100% equity in all investments in new projects and in expansion / diversification projects in existing


Malaysian companies. However, there are sector-specific regulations issued by various government departments to be mindful of. In some cases regulatory approval must be sought, which should be factored into deal timelines, allowing some elbow room for unforeseen hold-ups. The main industries subject to foreign investment restrictions are: a) financial services; b) stock exchange and leasing companies; c) capital markets; d) insurance and Takaful (Islamic insurance); e) oil and gas industry (upstream and downstream); f) the automobile industry; g) communications and multimedia (including broadcasting); h) wholesale and distributive trade (in relation to hypermarkets); i) education; j) healthcare; k) freight forwarding and shipping; l) water distribution; m) energy supply; n) employment agencies; o) security services; and p) professional services (Hogan Lovells, 2015).

CONCLUSION Markets today are more volatile and interconnected than it was 10 years ago. Moreover everybody can access the same information as most analysts do and this somehow levelled the playing field. One of the toughest challenges facing investors is keeping up with the trend in the economy and how to use it to aid them in theirs investment decisions. To understand the current and future trend of the economy investors will need to understand some basic economic indicators. This can be interpreted as you need a strong economy to sustain a strong stock market and not the other way round. Since stock prices are boosted by current and future expectations of earnings, without a strong economy how can companies increase and sustain their earnings? When 7

economic conditions are improving people feel more confident and willing to spend more. This will help boost the output of businesses and hence profits which in turn will increase their investments. In the Economic Transformation Programme (ETP) Annual Report 2014, the Performance Management and Deliver Unit (PEMANDU) said: “The progress of this NKEA in 2014 demonstrated that Malaysia’s financial services stakeholders possess the right capabilities to transform the financial landscape.” Among the Entry Point Projects (EPP) under NKEA is

. This EPP seeks to enhance the vibrancy and liquidity of

Malaysia’s capital market to attract quality stock market listings and investors, which will in turn mobilise capital to fund business growth and stimulate new investment (EPP 1: Revitalising Malaysia's Equity Markets, 2014). Despite of the economy downturn in 2015, MIDF Research said Malaysia could be one of the beneficiaries should global money return to emerging markets, whose currencies and equity prices had been in the doldrums for a prolonged period, in a big way in 2016 (Promising outlook for Malaysia's equity market next year, 2015). It is hope that Malaysian equity keep on blooming in the coming years.


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