Capital Market Review. Review of 2003

Transcription

1 Capital ket Review Review of 23 Outlook for 24

2 REVIEW OF 23 INTRODUCTION As the global and domestic environment strengthened, the balance of risks to the Malaysian capital market tilted strongly to the positive during the course of 23. The economic outlook became increasingly upbeat as domestic demand remained strong and external demand recovered. Geopolitical risks and SARS-related concerns that had kept investor risk aversion high, retreated somewhat towards end-il. Caution ahead of the political handover from Tun Dr Mahathir Mohamad to Dato Seri Abdullah Ahmad Badawi had largely subsided by the time the ober transition date drew near. Strengthening global markets lifted sentiment in the local capital market, and led to a resurgence of interest in the KLSE (Chart 1). Equity prices rose the benchmark KLSE CI climbed 22.8%, reversing its 7.1% fall in 22 while market liquidity showed considerable improvement from the previous year. Despite some uncertainty over interest rates in the latter half of the year, corporates continued to find the ringgit bond market a very conducive place to raise funds as borrowing costs remained near historical lows. This prolonged period of low interest rates, coupled with a rebound in business confidence, set the stage for strong issuance of ringgit debt. Overall, the capital market accounted for 83% of net Chart 1 Overview of ket-related Developments in KLSE CI (LHS) KLSE trading volume (RHS) 18 : TNB settles with UBS 5 : Bomb blast in Jakarta 8 : S&P upgrades Malaysia 31 : New PM installed 1,6 1,2 KLSE CI Jan: Valuecap launched 11 : 1 new capital market measures announced 2 : US-led attack on Iraq : SARS concerns 21 : Economic package unveiled : 1-lot board sizes introduced 12 : Budget 24 unveiled 29 : ASTRO listing 11 : Govt postpones indefinitely double-track railway project 8 Million shares Jan Jan 4 Sources: Securities Commission, Kuala Lumpur Stock Exchange, Thomson Financial Datastream 1-2 CAPITAL MARKET REVIEW

3 funds raised by the private sector in 23, compared with 63% in 22 (Chart 2). Most capital market intermediaries and corporates in Malaysia benefited from improved equity market conditions and generally stable bond market conditions in Malaysia during 23. The impact of a rise in long-term bond yields in the second half of the year was mitigated by the continued improvement of corporate balance sheets that reduced Malaysia s vulnerability to risks. temporarily interrupted by heightened geopolitical risk, but resumed following the easing of tensions (Charts 5 6). Rising equity prices eased pressure on insurers and pension funds by boosting the value of their equity holdings, while the rise in long-term bond yields increased the income from their bond investments. For example, it is estimated that the pension fund deficits for UK FTSE 1 companies fell to less than 5 billion by end-23 from 1 billion in early 23. Chart 3 Policy Interest Rates in the US, UK, Eurozone and Japan GLOBAL MARKET ENVIRONMENT Ample liquidity played a key role in keeping global financial markets afloat amid uncertainties and shocks in 23. Despite the economic shocks associated with Iraq and the Severe Acute Respiratory Syndrome (SARS) epidemic in East Asia, global financial markets stayed resilient, supported by excess liquidity in the financial system following a period of historically low interest rates (Charts 3 4). The narrowing of spreads on corporate and emerging market bonds that had begun in the fourth quarter of 22, amid investors search for yield, continued throughout the Iraq and SARS-related uncertainties. The equity market rally that had also started at end-22 was Interest rate (%) US UK Japan Eurozone Chart 2 Net Funds Raised by the Private Sector Chart 4 International Reserves in Selected Countries in Asia ex-japan 6 Net issuance of corporate bonds Net issuance of equities Net loans disbursed China Korea Taiwan RM billion 2 US$ billion CAPITAL MARKET REVIEW 1-3

4 A characteristic of financial markets in 23 was that investor interest tended to be selective and focused on market segments that were cyclical and sensitive to economic recovery. Themes included small-cap stocks, TMT (technology, media, telecom) stocks, emerging market recovery plays, as well as emerging market debt and lower-grade corporate bonds (Charts 7 8). In Asia, Thailand and India were the best-performing equity markets as investors were attracted by the strong growth potential of these two economies, as well as favourable equity valuations. India also benefited from more outsourcing business from multinational companies, and lower geopolitical risk as India and Pakistan moved to improve their relationship (Charts 9 1). China was another emerging market play favoured by investors in 23. Although shares listed on China s stock exchanges were Chart 5 Performance of Emerging ket and High-yield Corporate Bonds Chart 7 MSCI Equity Indices (% Y-o-y Change in 23 and 22) 16 JPM EMBI+ Composite Lehman US high-yield corporate MSCI Emerging ket Free MSCI G Price index (1 Jan 22 = 1) 12 1 MSCI Emerging ket Free Latin America MSCI Emerging ket Europe & Middle-East MSCI Asia Pacific ex-japan Free MSCI USA Jan 2 Jan 3 Jan 4 MSCI European Union Year-on- year change (%) Chart 6 MSCI World Equity Index vs Lehman Bros Global Bond Index Chart 8 Performance of Cyclical vs Defensive ket Segments in MSCI World Lehman Bros Global US S&P 6 Small Cap US S&P 5 Composite Price index (1 Jan 22 = 1) World-DS TMT World-DS ex-tmt Lehman Bros High Yield Corporate Lehman Investment Grade AAA JPM EMBI+ Composite Lehman Bros G7 Global Jan 2 Jan 3 Jan Year-on-year change (%) 1-4 CAPITAL MARKET REVIEW

5 capped by expensive valuations and fears that the government might unload its substantial holdings of stocks, global investors sought exposure to the rapidly growing Chinese economy through other ways, as was manifested in the high subscription rates of IPOs of Chinese companies and the Chart 9 Benchmark Stock Indices in Asia ex-japan (% Y-o-y Change in 23 and 22) Thailand SET India SENSEX Indonesia JComp Philippines PComp Hong Kong Hang Seng Taiwan TWSE Singapore STI Korea KOSPI Malaysia KLSE CI China Shanghai A Australia S&P ASX 2 China Shanghai B Year-on-year change (%) price performance of mainland Chinese companies listed in Hong Kong the so-called H shares (Chart 11). The US dollar s decline continued in 23, with its trade-weighed value falling by 14.8%, adding to its 7.3% fall in The falling dollar was beneficial to the US economy by increasing its export competitiveness and boosting the profits that US multinationals earned on their overseas operations. Another notable impact was that the weak dollar boosted asset returns of countries whose currencies appreciated against the dollar (Chart 12). Risk of a disorderly adjustment of the dollar was mitigated by active central bank intervention in the currency markets. Some Asian central banks continued to purchase large amounts of US Treasury securities, even as purchases by other foreign investors fell to their lowest levels since the global financial market crisis year of 1998 (Chart 13). By end-tember, Asian investors held approximately one quarter of the outstanding stock of US Treasury debt, with central banks and other official institutions accounting for a significant majority of purchases. Chart 1 PE Ratio of Asian Benchmark Stock Indices Chart 11 Performance of Hang Seng China Enterprises vs Hang Seng Composite (23) End-23 1-year average Hang Seng China Enterprises ("H shares") Hang Seng Composite PE ratio (times) Price index (1 Jan 23 = 1) Indonesia-DS ket Thailand SET India-DS ket China B-DS ket Korea KOSPI 2 Singapore STI Malaysia KLSE CI Taiwan TWSE Philippines PComp Australia S&P ASX 2 Hong Kong Hang Seng China A-DS ket 8 Jan Note: For Indonesia, China and India, PE ratio is for the DS-ket index of the respective markets. 1 Trade-weighted value of US dollar against major currencies, calculated by the US Federal Reserve. CAPITAL MARKET REVIEW 1-5

6 Global financial sector intermediaries recorded strong profits during the year. Securities firms and banks saw sharp earnings growth on the back of robust bond trading and recovering investment banking operations. Although financial advisory revenue was almost flat due to slow mergers and acquisitions activity, this was offset by an improvement in underwriting revenue. In Asia ex-japan, for instance, debt and equity issuance rose by 56% in value in 23 from 22, propelling investment-bank fees higher. 2 Continued emphasis on cost-cutting also helped boost profits, including the trend towards offshoring, or the relocation of jobs offshore to cheaper countries such as India and China. Offshore job transfers increased and broadened in 23 from back office functions such as data entry, transaction processing and account reconciliation, offshoring increasingly involved more high-end valueadded activities such as financial analysis, research and accounting. Partly due to offshoring, the number of people employed in the securities industry in New York, for example, had by ember 23 dropped by 41, from its peak, to 176,. 3 The global financial services industry was however hit by several developments that negatively affected the reputation of certain segments of the industry. Among these developments was the investigation into trading malpractices in the US mutual fund industry. The more intense scrutiny of mutual fund practices added urgency to the pressures for reform. In particular, fund firms found that they were faced with greater pressure to increase transparency by revealing unseen fees and expenses, and eliminating conflicts of interest. Another development was the uncovering of fraud at Italian dairy group Parmalat, which, like several other corporate scandals in the recent past, highlighted the failure of auditors and credit rating agencies in performing their functions. The case also focused greater scrutiny on the transparency of global corporate bond markets, and the role of investment banks and offshore financial centres in facilitating structured products and SPVs designed to obscure the balance sheets of firms. Chart 12 Impact of Exchange Rate Movements on Equity Returns in Selected kets in 23 Chart 13 Net Foreign Purchases of US Treasuries Local currency US$ Net purchases of Treasuries by foreign investors Net purchases of Treasuries by Asian investors Index change (%) US$ billion MSCI USA MSCI EM Malaysia MSCI Euro MSCI Japan MSCI Thailand MSCI Indonesia MSCI EMF Latin America -4 Q1 Q1 1 Q1 2 Q1 3 2 According to financial information provider Dealogic, the combined value of debt and equity issues in non-japan Asia reached US$85.3 billion in 23, from US$54.7 billion in According to the Securities Industry Association. 1-6 CAPITAL MARKET REVIEW

7 GLOBAL EQUITY MARKETS Global equity markets were resilient despite significant economic and geopolitical shocks and uncertainties surrounding the US economic recovery in the first quarter of the year. In East Asia, concerns over the destabilising impact of the SARS epidemic adversely affected stocks in the travel and retail industry. However, the dampening effect of SARS on stock prices was shortlived, and there was no threat to market stability, despite indications of substantial economic costs imposed by the outbreak. Estimates suggest that the total cost for East Asian economies amounted to about US$18 billion, or.6% of GDP (Malaysia: US$.4 billion or.4% of GDP). 4 The decline in risk from the second quarter onwards sparked off an equity market rally. The early end to the war in Iraq was a major factor in dispelling investor uncertainty, but the rally was also supported by a raft of economic data, particularly for the US and Japan, which exhibited greater strength than expected. Consensus forecasts in ember 22 predicted a 2.7% growth in US GDP in 23; by ember 23, these forecasts had been revised upwards to 3.1%, with growth expected to strengthen further to 4.4% in 24. Economic recovery brought with it greater expectations of a recovery in corporate earnings, which increased the attractiveness of equities. In the event, earnings growth turned out to be strong in 23 in the US, earnings rose by 28% from 21, while in Europe, earnings largely met or exceeded expectations despite the strength of the euro (Charts 14 15). Low interest rates on government bonds, by pushing bond-to-equity earnings yield ratios to long-term lows, also made equity valuations relatively more attractive (Charts 16 17). The rally in the secondary market, in turn, had a positive impact on the primary market especially towards the end of the year, although total new issuance in global equity markets in 23 still fell short of 22 levels. There were an estimated 735 IPOs globally in 23, raising a total of US$44 billion, compared with the 955 IPOs in 22 that raised US$58 billion (Chart 18). In Asia, although equity issuance was flat compared with 22 levels, partly due to the disruptive effects of SARS, the IPOs that came to market enjoyed a better reception in terms of subscription rates. Chart 14 Growth of Real GDP, Personal Consumption and Private Investment in the US Chart 15 Growth of US Corporate Profits 15 Personal consumption (LHS) Gross private domestic investment (LHS) GDP (RHS) % y-o-y change -5 2 % y-o-y change % y-o-y change Q1 Q1 1 Q1 2 Q Q Q Source: US Bureau of Economic Analysis Source: US Bureau of Economic Analysis 4 Asian Development Bank, Asian Development Outlook 23 Update, tember 23. CAPITAL MARKET REVIEW 1-7

8 GLOBAL BOND MARKETS After being on a generally downward trend since 2, US and global bond yields started rising in mid-23. A stronger growth outlook, which raised the likelihood of monetary policy tightening, pushed up market interest rates especially at the long end of the yield curve (Charts 19 2). The rise in US yields was exacerbated by the unwinding of hedge trades by investors of mortgage-backed securities. However, there were few signs of financial distress, and losses appeared neither particularly concentrated nor large relative to capital. This contrasted with the experience of 1994, when a spike in bond market volatility triggered by monetary policy tightening, resulted in major losses to financial institutions. Chart 16 Bond-to-equity Earnings Yield Ratio in the US Chart 18 Number of IPOs in the US year average 6 Ratio Number of IPOs Q1 Q1 1 Q1 2 Q1 3 Source: Securities Commission estimates based on Thomson Financial Datastream data Source: Hoovers Chart 17 Bond-to-equity Earnings Yield Ratio in Germany Chart 19 1-year Benchmark Bond Yields (% Y-o-y Change in 23 and 22) 2.5 Japan year average US Ratio UK Germany % y-o-y change Source: Securities Commission estimates based on Thomson Financial Datastream data 1-8 CAPITAL MARKET REVIEW

9 Rising bond yields in 23 did, nevertheless, raise some concerns. While a rise in government bond yields is usually taken to imply confidence in the strengthening economic outlook, and thus might be considered a healthy sign; the high indebtedness of the private sector and, related to this, the adverse impact on consumption and spending that higher interest rates would have on debt and interest payments, led to concerns that the nascent economic recovery would be threatened (Charts 21 22). Emerging market credit spreads tightened significantly over the year, despite the bond market correction in mature markets. Investor sentiment was helped by improved economic prospects, as well as by a series of Chart 2 US Yield Curve Chart 22 ket Composite Index of Mortgage Loan Applications in the US (23) End End-23 2, 3 1,5 Yield (%) Index level 1, M 2Y 3Y 5Y 7Y 1Y Jan Source: Mortgage Bankers Association of America's Weekly Mortgage Applications Survey Chart 21 US Conventional Mortgage Interest Rate Chart 23 Performance of Emerging Bond kets in Latin America, Asia and Europe EMBI+ Latin America EMBI+ Asia EMBI+ Europe Percentage (%) Jan 2 Jan 3 Jan 4 Total returns index (1 January 22 =1) Jan 2 Jan 3 Jan 4 7 CAPITAL MARKET REVIEW 1-9

10 credit rating upgrades of several emerging market sovereigns. In ober, 1 emerging market sovereigns were upgraded by at least one of the three major international rating agencies, mostly in Asia. 5 The resulting rally was led by higher-yielding credits and the Latin American sub-index of JP Morgan s EMBI+. This Chart 24 Net Issuance of International Debt Securities by Developing Countries was indicative of expectations that investors search for yield would compress yield spreads of issuers with ratings at the lower end of the credit spectrum faster than spreads of more highly-rated issuers. The latter had already fallen in many cases to near-historic lows (Chart 23). Attracted by favourable financing conditions, sovereign and corporate borrowers increased their fund-raising through the international and domestic debt securities markets (Charts 24 25). 3 MALAYSIA 25 US$ billion Q1 Q1 1 Source: Bank for International Settlements Q1 2 Q1 3 Risk to financial stability and market confidence in the Malaysian capital market was low despite the substantial economic and geopolitical shocks that occurred in 23. Key financial stability indicators remained strong. International reserves were boosted by the current account surplus, while the government s plans for fiscal consolidation were welcomed by economists and other observers (Charts 26 28). The banking sector continued to benefit from progress in restructuring and reforms, helped by the overall improvement in economic conditions, higher interest margins, better cost controls, and lower provisioning (Chart 29). Chart 25 Net Issuance of Debt Securities by Corporates US$ billion Q1 International debt securities Domestic debt securities Q1 1 Q1 2 Q1 3 Corporate sector vulnerability continued to decrease during the year, as reflected in a number of indicators. Equity prices rose, and corporate bond spreads were lower at end-23, compared with end-22, suggesting that market participants had become gradually more optimistic about the outlook for the corporate sector (Chart 3). Financial indicators continued to improve (Charts 31 32). Debt-equity ratios declined, as stronger profitability and higher equity valuations assisted companies in restructuring their debts. Cash flow adequacy indicators, such as interest coverage ratios, also improved for the majority of companies. Balance sheet adjustment was further helped by easier access to bond market financing, which allowed a number of companies to refinance their bank debts at longer maturities. Source: Bank for International Settlements 5 The 1 were China, Hong Kong, Indonesia, Macau, Malaysia, Pakistan, Thailand, Greece, Russia and Turkey. Improving fiscal fundamentals and increased reserves were typically cited. 1-1 CAPITAL MARKET REVIEW

11 Chart 26 International Reserves of Bank Negara Malaysia Relative to Short-term External Debt Chart 28 Federal Government Budget Deficit as % of GDP Net international reserves (LHS) 16 Ratio of reserves to short-term external debt (RHS) RM billion Times Percentage (%) Q1 Q1 1 Q1 2 Q f Note: f = forecast. Chart 27 Current Account Balance as % of GDP Chart 29 NPL Ratio and Banking Sector Risk-weighted Capital Ratio NPL ratio (3 -mth classification) Risk-weighted capital ratio 12 Percentage (%) Peratusan (%) f Jan Jan 1 Jan 2 Jan 3 Jan 4 Note: f = forecast. CAPITAL MARKET REVIEW 1-11

12 ket liquidity strengthened in the KLSE on the back of healthier investor sentiment (Chart 33). Improving economic conditions prompted a sovereign rating upgrade by Standard & Poor s, putting Malaysia s rating on par with South Korea s. This, together with expectations of a smooth transition in political leadership, led international investment funds to raise their weighting on Malaysia from previously underweight positions (Charts 34 36). Apart from cyclical factors, proactive measures by the authorities to create a premier market, by enhancing the supply of quality investment products and ensuring a more performanceoriented culture, coupled with focused communication and Chart 3 Growth of Total Revenue at KLSE-listed Companies Chart 32 Proportion of All Non-financial Listed Companies with Positive Interest Coverage Ratio Less Than % annual change % of total Source: Bloomberg Note: The sample covers only companies that have reported 23 results at end-jan 24. Source: Securities Commission estimates based on Bloomberg data Chart 31 Average Debt-equity Ratio of the 2 Largest Listed Companies on the KLSE Chart 33 Turnover Velocity of Domestic Shares in Malaysia vs the Regional Average Malaysia (LHS) Average in Asia-Pacific ex-japan (RHS) Times Percentage (%) Percentage (%) Jan 2 Jan 3 Source: Bloomberg Note: 2 largest companies, by market capitalisation. Source: World Federation of Exchanges Note: kets in Asia-Pacific ex-japan here are Australia, Hong Kong, Jakarta, Korea, Philipines, Singapura, Taiwan and Thailand. Turnover velocity = Monthly turnover/month-end market capitalisation of domestic shares CAPITAL MARKET REVIEW

13 marketing efforts, also contributed to the increase in and sustainability of liquidity. Participation in the derivatives market also rose in 23, suggesting greater investor understanding and appreciation of the use of hedging instruments and risk management techniques (Chart 37). KLIBOR contracts saw a significant jump in trading volumes in 23, up by 86.1% from the year before, partly due to increased interest in the local bond and interest rate swap markets. Trading in crude palm oil (CPO) futures contracts rose by 41.6%, in tandem with rising CPO prices, as was consistent with Chart 34 Trend of Long-term Foreign Currency Sovereign Ratings of Malaysia and Korea Chart 36 Net Portfolio Equity Inflows to Malaysia 25 Malaysia Korea Points based on rating (AAA highest score) RM million Chart 35 Consensus Recommended Weighting of Malaysia by Fund Managers 1.5 Very overweight 1. Overweight.5 Slightly overweight Neutral Very underweight Q1 Q1 1 Q1 2 Q1 3 Source: Securities Commission based on Standard & Poor's credit ratings Chart 37 Trading Volumes on Malaysia Derivatives Exchange 25, CPO futures KLIBOR futures 2, KLSE CI futures MGS 5-yrs 15, Weighting Slightly underweight Contracts 1, Underweight 5, Jan 2 Jan 3 Jan 4 Jan 97 Jan 98 Jan 99 Jan Jan 1 Jan 2 Jan 3 1 Jan 4 Source: Dow Jones Newswires poll of fund managers Source: Malaysia Derivatives Exchange CAPITAL MARKET REVIEW 1-13

14 global trends commodity exchanges in the US and Europe reported record trading activity for 23, on the back of rising demand for raw materials from the rapidly expanding Chinese economy and the pick-up in global economic activity. There was a decline in investment concentration risk brought about by greater diversity in portfolio profiles. Investment in bonds grew in popularity, with the total number of bond unit trust funds growing by 72.4% from 29 at end-22 to 5 at end-23 (Chart 38). The MESDAQ ket saw a 16-fold increase in trading volumes in 23 from 22, and the listing of 2 new companies, bringing the total number of listed companies to 32. Both the increase in trading activity and in the number of listings significantly boosted its reputation and standing as a viable exchange for high-growth companies (Chart 39). There was also Chart 38 Number of Unit Trust Funds Chart 4 Performance of the KLSE CI, Second Board Index and MESDAQ Index Equity funds Bond funds Balanced funds 19 KLSE CI Second Board Index MESDAQ Index 12 Money market funds 17 Number of funds at end-period Price index (1 Jan 22 = 1) Source: Securities Commission Note: Bond funds include bond funds, fixed income funds and guaranteed funds. Chart 39 MESDAQ ket Trading Volumes and Number of Listed Companies Chart 41 Monthly Trading Volumes on the KLSE Main Board, Second Board and MESDAQ ket 35 3 No. of companies at month end (LHS) Average daily trading volume (RHS) Main Board Second Board MESDAQ ket Jan 2 Jan 3 Billion of units Jan 2 No. of companies Jan Jan 2 Jan 3 Jan 4 Sources: Thomson Financial Datastream, Bloomberg Million units 5 2 Source: Kuala Lumpur Stock Exchange Source: Kuala Lumpur Stock Exchange 1-14 CAPITAL MARKET REVIEW

15 renewed interest in Second Board stocks, as investors engaged in sectoral plays, in particular in oil and gas-related stocks (Charts 4 41). Like their global counterparts, capital market intermediaries operating in Malaysia recorded stronger profits. Improved investor sentiment led to higher trading volumes on the KLSE, and this boosted KLSE trading volumes, as well as the revenues of stockbrokers. Investors also increased indirect participation in the capital market via investments in unit trusts (Charts 42 44). Issuance of debt securities continued to be strong, amid the low interest rate environment, boosting investment-banking fees. Debt issuance slowed in the second half of the year, as the global bond market turned, leading intermediaries to shift their focus somewhat to the equity issuance segment (Chart 45). Chart 42 NAV of Equity Unit Trust Funds at End-period Chart 44 Number of Units in Circulation in the Unit Trust Industry at End-period Equity funds Bond funds Balanced funds Money market funds 4 6 RM billion 3 Number Source: Securities Commission Source: Securities Commission Note: Bond funds include bond funds, fixed income funds and guaranteed funds. Chart 43 NAV of Bond, Balanced and Money ket Unit Trust Funds at End-period Chart 45 New Funds Raised in the Equity and Corporate Bond kets 8. Bond funds Balanced funds Money market funds New funds raised in the equity market New funds raised in the corporate bond market RM billion 4. RM billion Q1 1 Q1 2 Q1 3 Source: Securities Commission Note: Bond funds include bond funds, fixed income funds and guaranteed funds. CAPITAL MARKET REVIEW 1-15

16 Equity ket Liquidity in the Malaysian stock market improved as strengthening equity market conditions and positive spillover sentiment effects from the global rally attracted investors back into the market. There was a notable increase in retail investor participation, which helped lift trading volumes from a daily average of 253 million shares in 22 to 55 million in 23. However, trading values rose by less, as the average price per share traded fell, in line with retail investors preference for lower-priced stocks (Charts 46 47). Retail investor participation boosted trading interest in smaller-cap stocks. As a result, some segments of the market experienced substantial price increases and their valuations rose significantly (Chart 48, Table 1). However, other Chart 46 Monthly Trading Volume and Value on the KLSE, and Average Price per Share Traded Chart 48 EWMA Volatility of the KLSE CI, Second Board Index and MESDAQ Index (23) 4 3. Volume (LHS billion units) Value (LHS RM billion) Price per share (RHS) % 5% 4% KLSE CI Second Board Index MESDAQ Index Billion units / RM billion RM EWMA volatility 3% 2% 1% 1. % Jan 2 Jan 3 Jan Source: Kuala Lumpur Stock Exchange Source: Securities Commission calculations using Thomson Financial Datastream data Note: The chart depicts exponentially weighted moving average volatility of daily index returns. Chart 47 Trading Value on the KLSE by Individual vs Institutional Investors Chart 49 gin Financing vs KLSE CI 8 6 Individual Institution 1, 1, Total approved (LHS) Outstanding (LHS) KLSE CI (RHS) 8, 9 Percentage of total (%) 4 RM billion 6, 4, 8 7 Index 2 2, Jan Jan 1 Jan 2 Jan 3 Jan 4 Source: Kuala Lumpur Stock Exchange Source: Securities Commission 1-16 CAPITAL MARKET REVIEW

17 symptoms of an overheating market were absent, for instance borrowing on margin for stock purchases and the utilisation of margin facilities remained low (Chart 49). Equity issuance grew in the second half of 23 in line with the improvement in market conditions. The largest offering was of ASTRO All-Asia Networks, which raised RM2.3 billion and was Southeast Asia s largest IPO in 23. It was the first company to be floated following the relaxation of listing guidelines for foreign companies. Prior to this, a company applying for listing on the KLSE had to be Malaysian-incorporated with a majority of its operations in the country. The level of interest for IPOs was high, especially for smaller-cap stocks in line with the increased participation of retail investors in the stock market (Table 2). However, the amount of funds raised in 23 fell short of 22 levels, due to uncertainties arising from the Iraq conflict and the SARS outbreak in the first half of the year. It may also have reflected the preference of many companies to opt for debt financing in the low interest-rate environment, at least in the first half of the year (Chart 5). Table 1 Oil and Gas, and MESDAQ Stocks: Average % Y-o-y Change in Share Price and PE Ratio in 23 Average Y-o-y Increase in 23 (%) Share Price 12-month Forward PE Ratio Oil and gas stocks (excluding Petronas, Shell) MESDAQ stocks In comparison: KLSE CI Source: Securities Commission estimates based on Thomson Financial Datastream data Chart 5 Number of IPOs and Funds Raised 1,6 1,4 1,2 Funds raised through IPOs (LHS) Number of IPOs (RHS) 25 2 Table 2 IPOs on KLSE: Average Over-subscription Rate and Price Premium Average Over-subscription (times) Main Board RM billion 1, Q1 1 Q1 2 Sources: Kuala Lumpur Stock Exhange, Bank Negara Malaysia Note: Funds raised through IPOs for 23 is up to ember 23. Data for funds raised is from Bank Negara Malaysia, which may not correspond to the date of the IPO. Q No. of companies Second Board MESDAQ n.a KLSE Average Premium Price on First Trading Day (%) Main Board Second Board MESDAQ n.a KLSE Source: Kuala Lumpur Stock Exchange CAPITAL MARKET REVIEW 1-17

18 Bond ket The ringgit bond market was susceptible to spillover effects from mature bond markets. Yields in the ringgit bond market bottomed out in e 23 and rose in the second half of the year in tandem with global bond markets, as the market priced in economic strengthening and higher inflation expectations. The risk premium on Malaysian bonds, however, remained low as seen from the narrowing of spreads of Malaysian international bonds over comparable US Treasuries, propped up by strong economic fundamentals and the sovereign ratings upgrade by Standard & Poor s in ober (Charts 51 52). As in global markets, lower-rated credits also outperformed their higher-rated counterparts in the Malaysian bond market (Chart 53). Chart 51 Yield Spread of Asia Credit Index Composite and Asia Credit Index Malaysia, over Comparable US Treasuries Chart 53 Spread of AAA-rated PDS over BBB-rated PDS (5-year yields) Asia Credit Index Asia Credit Index Malaysia BBB-rated PDS yield (LHS) AAA-rated PDS yield (LHS) Spread (RHS) Basis points (1 Jan 22 = 1) Yield (%) Spread (basis points) Jan 2 Jan 3 Jan 4 Source: Bloomberg Source: Bloomberg Chart 52 1-year Benchmark Bond Yields in Malaysia and the US 13 Malaysia US 11 Jan 2 Jan 3 Jan 4 Jan 2 Jan 3 Chart 54 New Funds Raised in the Domestic Bond ket 6 5 Total Corporate Bonds Yield, % (1 Jan 22 = 1) 9 7 RM billion Q1 1 Q1 2 Q1 3 Sources: Bloomberg, Thomson Financial Datastream 1-18 CAPITAL MARKET REVIEW

19 Chart 55 New Issuance vs Net Issuance of Corporate Bonds Chart 57 New Issuance of Corporate Bonds by Sector (23) 3 New issuance Net issuance Agriculture and Mining 2% Manufacturing, construction and utilities 43% 2 RM billion 1-1 Services 55% 2 Q1 1 Q1 2 Q1 3 Chart 56 New Issuance of Debt Securities by Type (23) Convertible Bonds 3% Straight Bonds 29% Government Investment Issues (GII) 2% Khazanah Bonds (KB) 3% Malaysian Government Securities 43% Islamic Bonds 8% Asset-backed Bonds 4% Cagamas Bonds 8% Despite the bottoming out of yields, new issuance of debt securities was higher in 23 compared with the year before (Chart 54). New issuance of corporate bonds in 23 was 6.6% higher than in 22 as Malaysian corporate issuers, like their global counterparts, took advantage of the historically low borrowing rates, and as debt restructuring efforts continued. There was substantial replacement activity in 22 that resulted in low amounts of net funds raised (i.e. after taking account of redemptions). In 23 though, net funds raised in the corporate bond market jumped significantly to RM26.2 billion, reflecting greater corporate activity and business investment plans in view of the brighter economic outlook (Charts 55 57). CAPITAL MARKET REVIEW 1-19