KLCI - More dislikes than likes

I met a group of seasoned semi-retired analysts, fund managers and potential investors over the last Sunday. Over our ‘the-tarik’ discussion, we are sort of in common agreement that Malaysian equities are marginalized, and there are no significant efforts to dig ourselves out of bottom pit since the 1997/98 crisis.

The Government-linked companies (GLC) restructuring story is no longer the buzzword of the day. Other than focusing on initial phase of business re-engineering, including cost rationalization and working capital management, efforts to improve their core competencies are seemingly no longer part of the mantra. This is evident from the declining foreign shareholding in top GLC companies and we sense the demand for more transparency and accountability from Khazanah’s investee companies apparently fizzles out as they entering into Phase 3 Transformation Program. About 35% of KLCI’s market capitalization is linked to GLC and you must realize by now that these companies operate in an environment where government regulation is heavy. So you really have to wonder how strong their balance sheets and income statements really are.

What left proudly visible in the transformation journey is not more than series of coloured books, well-archived deep in our well-trusted libraries, perhaps one day it may be just to be as a good source of reference for MBA and graduate students in times to come.

The argument that Malaysia is the top pick, especially in times of uncertainty, due to its defensive quality and low beta market is getting less irrelevant. Bursa’s market velocity is amongst the lowest in Asia ex-Japan and is still relatively under-owned by foreign investors. Rising political tension, which is not likely to ease in the foreseeable future, has raised the beta of this market, and even solid blue chips with low betas are following the market south. Only one of the two largest sectors on the KLCI namely plantation is quite immune (not really immune after all) from this uncertainty. The top 10 stocks account for 50% of the KLCI. Sometimes you just have to wonder how much choices that investors in the perceived defensive Malaysian market really has to offer.

These are latest additions to long series of common grouses of portfolio investors about Malaysian equities. Top of the grouses are (i) relatively small markets, in terms of market capitalization, (ii) relatively illiquid and/or low free float, (iii) few listed world class companies, (iv) misconstrued existence of capital controls, (v) cumbersome administrative rules, (vi) expensive PE valuations relative to other markets etc.

What is really left to be appreciated, else possibly the last retention tool of why someone may want to have an exposure to this market is the increasingly higher dividend yields. Dividend yields in the Malaysian equity market are attractive and supported by good dividend payouts. The estimated dividend yield for Bursa Securities is estimated at 4.25% as at 31 March 2008, above the long-term average yield of 2.59%, thumping its peers by 50-100 percentage points. Its current yield is also not too far from its historical high and also beats the current fixed deposit rates of around 3.5%.

Watch out for the consumer, tolling, gaming, plantation, and telecommunication to raise their dividends in the coming years. This will, apparently, come from a combination of improved earnings and higher payout ratios.