Remaking Malaysia: Investing in the New Malaysia
The Prospects for Capital Markets
Ranjit Ajit Singh
Director, Securities Commission
August 3rd 2004, Kuala Lumpur
- Ladies and Gentlemen, Good afternoon. Let me first of all thank the organizers of this conference for inviting me to participate at this session on the capital market. In assessing the prospects for Malaysia’s capital market, I wanted to start off with a big-picture perspective of current changes in the landscape. These shifts trigger a chain of responses that affect the overall competitive environment and, impact on industry structures and exert a strong influence on future outcomes for all capital market players.
Rise of the large Asian capital markets
- One major and obvious development has been the rapid growth of capital markets for Asian countries, particularly China and India. Eight years ago, the combined market capitalization of the Shanghai and Shenzen stock exchanges was USD42 billion – smaller than even the Jakarta exchange, which was at that time about USD67 billion. Now, the combined market capitalizations of both exchanges have now grown ten fold and are at USD488 billion.
- Similarly in the case of India, its stock market capitalization exceeds that of Bursa Malaysia – which it did by almost doubling its size within eight years. These trends are expected to continue given their economic growth and large populations. Not surprisingly, most analysts expect China’s and India’s stockmarkets to be among the world’s top exchanges in the not too distant future.
- If economic growth and population size is a gauge for potential then the rapid growth of China and India will be closely followed by that of the Korean, Thai, and very likely Indonesian capital markets.
The emergence of ASEAN as an asset class
- One logical outcome from these landscape developments is the strong recognition and increasing efforts towards the integration of ASEAN capital markets and the recognition of the need to more actively develop and promote countries within ASEAN as an asset class.
- The south east Asian region accounts for nearly 10% of the global population and almost 15% of the global exports and yet it accounts for only around 1.6% of total global market capitalization. Clearly there is substantial scope for the region to be able to grow as an asset class from a global perspective.
- There are currently several initiatives that are being worked on under the auspices of the ASEAN Finance Ministers and the region’s capital market regulators that provide a basis towards achieving this objective. These include efforts in looking at harmonising rules and practices, fostering greater cross-border linkages such as among ASEAN exchanges as well as efforts towards developing and identifying a set of companies that can be promoted as an ASEAN benchmark. The end-objective of such efforts is to develop ASEAN as a more significant investment destination and to further accelerate the development of the region as a market.
Prospects from regional developments for the Malaysian capital market
- The emergence of the North Asian and Indian capital markets are already having a substantial impact on order-flows and portfolio allocations across the region. But while the emergence of these markets pose a competitive challenge; they can also create substantial spin-off growth opportunities capital markets, such as Malaysia’s. To borrow an example from the real economy, the tourism and education sectors in Malaysia has benefited substantially from the growth of its Asian neighbors.
- What we in the capital market need to think about is how to capture value from these regional developments to benefit the domestic capital market and its players. Within this context, there is a need to make a strategic shift to unlock the growth potential of Malaysia’s capital market – one key component being the need to enhance the levels of competitiveness.
- In addition, the trend towards integration means that, over the medium-term, the boundaries of the individual markets will expand to cover the whole region. As connectivity between markets increase, the key issue is how Malaysia can position itself as a base for parts of the value chain for regional capital market products and services.
- The ASEAN initiatives will, if successfully implemented, open up significant opportunities for the region’s capital market players regardless of whether they are institutions or intermediaries. We may still be some way away from an integrated market but there may still be gains from increased collaboration among the region’s capital markets.
- We recognize that cross-border initiatives are difficult to execute but the high-level commitment and support for increased regional cooperation seems to be there. Capital market players should certainly be considering ways to expand their business across the region and given that these are early days, they should invest resources into identifying opportunities and pursuing proposals with the relevant authorities..
Change and prospects for exchanges and markets
- Apart from the geo-political changes, significant structural shifts are also occurring in the financial services industry. Industry dynamics are being dramatically altered. Its impact is permeating through all segments of the financial services value chain and this is manifested by the emergence of the new business models and integrated service providers working in combination with globalization and convergence to threaten the traditional business models.
- Nowhere is this more evident than in the exchange business where the industry landscape dynamics has and continues to change dramatically. Technological advances are commoditizing the traditional exchange business and causing substantial changes in market microstructures. As an outcome, many exchanges around the world have demutualised and this has been followed by horizontal and vertical integration of exchange-related services in some instances.
- In this regard, our own exchange Bursa Malaysia has made good progress in preparing itself for these challenges and in strengthening its ability to take advantage of opportunities that may arise. The consolidation and demutualization exercises were completed quite smoothly and the exchange is now pursuing its planned listing. New customer-centric business strategies were devised while Bursa itself underwent a substantial re-organisation.
- The relationship of the delicate inter-linkages between one part of the capital market value chain undergoing transformation with other parts is also worth exploring further. In this regard, it is interesting to note that many of the initiatives being implemented by the “commercial” Bursa will create opportunities for the rest of its capital market stakeholders.
- One such key development is the implementation of a common trading platform which provides the ability to integrate market information and trade execution from many markets on a single terminal. The new platform is designed based on open architecture and will facilitate the introduction of new order-matching models and new ways of capturing and executing trades.
- The flexibility permitted by the new trading infrastructure is an important enabler for the re-engineering of business models throughout the capital market. The exchange and market intermediaries alike potentially will have a wide range of technological solutions that they can choose to re-design their business processes to differentiate themselves.
- Not only will capital market participants be endowed with the capability to respond quickly to cope with changing market conditions and customer requirements but they will also be positioned to create opportunities through their ability to deliver these solutions technologically. New initiatives, such as the proposal to establish trading links with Singapore being explored by Bursa, is an example of the type of strategies that can be considered.
- The change in the trading infrastructure is being complemented by efforts to establish an integrated clearance and settlements system with closer linkages with the payment systems. The objectives are to produce operational efficiencies and cost savings to all market participants.
- Overall, initiatives such as these being pursued by the demutualised exchange will help towards building liquidity in the domestic capital market and enhance its value proposition and strategic positioning in a network of exchanges around Asia.
- In this respect, the growth prospects for many segments of the Malaysian capital market are quite promising in that we know different product or market segments are increasingly being inter-linked or integrated and that strong growth in the liquidity of one segment is likely to have a positive spill-over effect on another.
- In this regard, I would like to single out two promising niches. One such niche is the Islamic Capital Market (ICM) where we have first mover advantage. The challenge for all Malaysian capital market participants is how we can convert the lead we have into a sustainable advantage that can allow us to differentiate and strengthen our market internationally. Within this context, we should note that other global and regional markets have noticed the strong growth prospects and are starting to venture into this market segment.
- I think we can also ask similar questions about the CPO contract. It is quite a well-established futures contract internationally and a product by which we can differentiate ourselves from other capital markets. The full growth potential of this market segment may not have been fully tapped and maybe industry can explore the various possibilities for maximizing value from this franchise.
Change and prospects for market intermediaries and investment managers
- Market intermediaries are also equally exposed to the vagaries of changing landscape dynamics. It is difficult to sit comfortably with a traditional business model as technology cannibalizes traditional intermediary functions for order execution and even the IPO business; even as it enables financial institutions to encroach into each other’s territory either directly or through cross-selling arrangements.
- The degree of change in the market intermediation business has been limited with substantial reliance on the traditional business model in the face of the challenges outlined earlier. While there are some are quite energetic in exploring new opportunities, one sometimes gets the impression that there is a reluctance, in some cases, to adjust to competitive market conditions.
- Within this context, the market intermediaries have strengths, which may be under-utilised. For example, they have reasonably strong balance sheets and the advantage of a strong distribution network, which can be deployed to much greater effect.
- It may be difficult for individual firms to find the appropriate solutions on their own to changes in the industry structure and possibly the industry association can spearhead the search for the appropriate solutions and maybe even undertake a pro-active role in driving change throughout the industry. This is the approach adopted in Korea where the Korea Securities Dealer Association (KSDA) seems to be pro-actively assisting efforts to re-engineer business models.
- Prospects for the investment management industry have clearly not gone unnoticed. Over the past decade, the accumulation of assets under management for the investment management industry, including pension funds, has been rather impressive – roughly tripling in size to RM430 billion over the period.
- On the back of Malaysia’s strong economic growth and high level of national savings, the investment industry may have reached a stage where assets are at a size where the effects of compounding are significant enough to act as a catalyst for a take-off for the investment management industry.
- If one expands the potential business area to include the region, then certainly the prospects are enormous and quite exciting. For example, a recent report estimated that wealthy individuals in Asia have assets worth USD6.5 trillion in 2003 and estimates that this could increase by almost 50% by 2008. The build-up in activity related to wealth management suggests that the global industry certainly thinks so.
- The challenge ahead is to ensure that we are positioned to maximize the full growth potential of the investment management industry. These include efforts to add more components of the industry such as the fledging financial planning industry or even the exploration into the establishment of private pension funds. There is certainly room for innovative thinking to find new ideas to further accelerate the pace of development in the investment management industry.
A regulatory perspective
- As a regulator, I would be remiss if I did not provide a regulatory perspective on future prospects for the capital markets. Prospects for capital markets are founded on maintaining high levels of investor confidence in the integrity of markets. Too often in the past, we have witnessed growth has been pursued without sufficient consideration for adequate checks and safety mechanisms; often culminating in adverse consequences for the marketplace.
- What is impressive is the rapid pace of capital market reform that is occurring in tandem with the growth of capital markets throughout Asia – involving both rule changes and the modernization of market infrastructure. This is a sign that the Asian capital markets are coming of age and a signal of intent to accelerate the pace of development.
- Within this context, Malaysia has established all the necessary components of a well-regulated marketplace. First, we have what is acknowledged to be a comprehensive corporate governance framework – with requirements for quarterly reporting and mandatory certification of financial statements by directors. Second, we have a rigorous accounting regulatory framework with Malaysian standards in compliance with 28 out of 33 IAS standards and mandated by law. Third, Malaysia broadly complies with the recommendations on securities settlements systems by the International Organisation of Securities Commissions (IOSCO) and the Bank of International Settlements Committee on Payment and Settlement Systems while its regulatory framework conforms broadly to the principles of securities regulation set out by IOSCO.
- More generally, this is consistent with the trend towards conformance with common standards on a global basis. In fact, Malaysia is also seeking to promote international harmonization and standard-setting as a means of promoting the development of the global Islamic Capital Market. One of the benefits of global standards is that they facilitate faster growth of the capital markets across borders.
- In tandem with this, there also seems to be increasingly greater levels of public scrutiny into business affairs and greater demands for accountability to an expanding range of stakeholders. The old days of when one could keep the affairs of a company private seem to be becoming extinct. Whether it be in the form of responding to demands for even greater disclosure of financial information or to complaints from pressure groups, it is clear that increasing demands are being placed on management resources to cope with this trend. Along with this, the costs of regulation can rise as they are estimated to have done in the US post the introduction of the Sarbanes-Oxley Act. Finding a balance between these increasing demands and rising regulatory burden will be a challenge for regulators worldwide but, in a sense, the ability to meet these demands can be viewed as a competitive tool that can be value enhancing and reduce the costs of capital.
- Overall, if I may conclude, the Malaysian capital market seems well positioned to meet the challenges and to capitalize on the opportunities arising from changing landscape dynamics. It benefits from its fundamentally strong market infrastructure and the strengths of its international economy and, most importantly, a fruitful collaborative partnership between the public and the private sectors.
- But apart from leveraging more effectively on our existing strengths, we may need to complement that with greater efforts to develop the “softer” parts of our capital market – namely the intellectual capital component. This may require higher levels of investment in technology and accelerating the pace of innovation. It is important to create a “buzz” in the Malaysian capital market – that is create a more vibrant marketplace by raising the bar on performance and service standards even higher.