Sneaking Around Invest Malaysia

Funnily enough, I didn’t get to attend any of the headlining events at the annual Invest Malaysia event yesterday (the PM’s keynote, Pemandu CEO Idris Jala). In fact, this is one event I’ve rarely attended – the audience is primarily analysts, fund managers and the media, and the message is generally tailored to foreigners. I can only recall one other time I’d been there, and that was over a decade ago.

This year, ironically, I got roped in not as a participant but as a presenter. Don’t bother trying to look me up though, we weren’t on the official program – it was a private presentation to a small group of fund managers from China. As I understand it, EPF did the same thing for this group earlier in the day.

I did my damnedest to “sell” Malaysia; not hard with all the foreign interest these days. The timing could of course have been better, the market being what it is right now. But I think that we’re really seeing foreign portfolio investors start taking the Malaysian market more seriously.

Whether that’s good or bad is of course another question.

Econophysics: Markets And Economies As Complex Systems

Via Wired Magazine comes this paper with a unique take on market behaviour (abstract):

Predicting economic market crises using measures of collective panic
Dion Harmon, Marcus A. M. de Aguiar, David D. Chinellato, Dan Braha, Irving R. Epstein, Yaneer Bar-Yam

Predicting panic is of critical importance in many areas of human and animal behavior, notably in the context of economics. The recent financial crisis is a case in point. Panic may be due to a specific external threat, or self-generated nervousness. Here we show that the recent economic crisis and earlier large single-day panics were preceded by extended periods of high levels of market mimicry --- direct evidence of uncertainty and nervousness, and of the comparatively weak influence of external news. High levels of mimicry can be a quite general indicator of the potential for self-organized crises.

The modelling approach used here takes cues from physics as well as behavioural economics, blending the two. I’ll admit I’m a neophyte at both – I’m completely unfamiliar with the approach used in this paper. But the premise, and the results are intriguing, despite the brevity of the paper (17 pages, including references).

Technical Notes:

Dion Harmon, Marcus A. M. de Aguiar, David D. Chinellato, Dan Braha, Irving R. Epstein, Yaneer Bar-Yam, "Predicting economic market crises using measures of collective panic", Feb 2011

In Defense of EPF

Strictly speaking this post isn’t about economics, but the reaction to EPF’s dividend announcement is a good argument for greater financial literacy:

Good, but it could be better, groups comment on EPF dividend rate

PETALING JAYA: EPF’s 5.8% dividend rate has been lauded, but some say the amount should have been even higher, given its large investments and the higher dividends offered by other funds and unit trusts.

Consumer activist and Federation of Malaysian Consumer Associations (Fomca) adviser Prof Datuk Dr Hamdan Adnan said the increase was good as it showed the economy was picking up.

However, he said it could have been higher, given EPF’s long-term existence and the dividend performance of other funds, which were not as old as EPF.

“We are glad it is higher. But there are funds that are offering dividends of between 8% and 10%. Even Amanah Saham Bumiputra is offering almost 9%. EPF is not even giving bonuses like trust funds do.

ETF’s, Index Tracking Investment, And Irrational Markets

One of the seminal contributions to the macroeconomic literature of the last fifty years was the Lucas Critique, which in short states that changes in policy affects individual behaviour, which in turn means that you can’t reasonably expect that policies implemented would have the intended effects based on historical macro relationships. More generally, everything affects everything else, and you can’t take things in isolation.

While this is part and parcel of the now controversial doctrine of rational expectations (for which Robert Lucas won the Nobel Prize in 1995), the fundamental point that Lucas was driving at is still valid – you can’t assume that interrelationships will always stay the same, if you change something within a system. The mania over structured finance products that helped drive this past global financial crisis is a case in point, but it applies to virtually any financial product or government policy.

Which brings me to this article in The Star today:

What are ETFs and why is it beneficial to buy them?
Personal Investing - By Ooi Kok Hwa

LATELY, the number of ETFs that get listed on Bursa Malaysia has been increasing.

At present, we have a total of five ETFs listed in Malaysia. Unfortunately, we have noticed that not many investors are aware of these instruments and there is also a lack of understanding on the true value of these ETFs.

Wither The Ringgit

The Ringgit has going form strength to strength, as this article asserts:

Malaysian ringgit expected to remain strong
Robust demand and credit growth may entice fresh foreign funds

KUALA LUMPUR: The ringgit, which temporarily broke to 3.08 level last week, is expected to remain strong.

“The market may hold up at this current level,” a dealer said, adding that robust domestic demand and credit growth were expected to entice fresh funds from foreign investors.

A forex dealer told Bernama that the ringgit might breach the 3.06 mark against the greenback in about two weeks, after hitting its strongest level since October 1997 at 3.0873.

The local unit rallied to new 13-year highs in four straight weeks amid speculation that rules would be further loosened to enable the local currency to be traded offshore…

…Yesterday, the local unit ended higher at 3.0900/0930 against the US dollar compared to Thursday’s closing of 3.0950/0980 after the local bourse managed to pare some of its earlier losses on bargain hunting activities.

Bloomberg reported that Barclays Capital Plc had raised its forecast for the local currency, predicting a 6.1% appreciation over the next 12 months as foreigners plow more funds into the nation’s assets.

FTSE Group, a global index provider, had also upgraded Malaysia to “advanced emerging market” status, a move that will attract as much as US$3bil of new inflows to the local stock market, Bloomberg quoted Barclays as saying.

A Matter of Principle

(I’ve been drafting this for a few days, and then Tun Mahathir has to go and steal my thunder!)

There are a few unspoken rules and principles I have followed since I started this blog. But since the readership has expanded, and I’ve gotten a few queries about writing outside the blogosphere, I thought I’d make these explicit, so there’ll be no misunderstandings. This post should also explain why I try not to write on certain subjects, even if they fall within the general ambit of the Malaysian economy.

Since I work in a public company that works for and services the financial needs of many Malaysians, there’s always a risk that my thoughts and opinions might be construed as representing the policies of who I work for. Even on an anonymous basis as I’ve tried to maintain on this blog, enough people know who I am and where I work, for this to become a potential issue.

Conflicts Of Interest: Bursa Malaysia Edition

No, this isn’t about BCorp and the do-they/don’t-they have a new sports betting license. I caught this on Bloomberg yesterday (excerpts, emphasis mine):

Malaysian Exchange Seeks to Lure Individual Investors

June 9 (Bloomberg) -- Malaysia’s bourse said it’s seeking to lure individual investors who have shunned the market a decade after the Asian financial crisis.

Bursa Malaysia Bhd. is working with brokerages and banks to “to reach out to retail investors in various towns and cities” to open up accounts and encourage online trading, Chief Executive Officer Yusli Mohamed Yusoff said in an interview in Kuala Lumpur.

Trading by individuals fell to as low as 20 percent of trading value from more than half before the start of the Asian financial crisis in 1997, when the benchmark index slumped by a record 52 percent.

“A lot of retailers lost a substantial amount,” Yusli said yesterday. The result is that the market is now “dominated by the local institutions,” he said.

Most individual savings started shifting to mutual funds and unit trusts since Malaysia’s economy went into a recession in 1998, Yusli said. They haven’t returned to stock trading even as the economy expanded at an annual average of 5 percent over the past decade and the benchmark index more than doubled...

...The exchange aims to boost the share of trading by individual investors “closer to a third,” tapping Southeast Asia’s second-highest savings rate, Yusli said, declining to give a target date. Malaysians saved 38 percent of gross national income in 2008, lagging behind only Singapore’s 47 percent, according to data compiled by the World Bank and Malaysia’s central bank.

The KLCI’s 45 percent gain last year lagged behind Southeast Asian neighbors even after the government announced stimulus plans totaling 67 billion ringgit ($20 billion) to help pull Southeast Asia’s third-largest economy out of a recession.

Trading slumped by half to an average $375 million a day over the six months ended May from the same period 13 years ago, right before the start of the regional financial crisis in July 1997, according to data compiled by Bloomberg. Neighboring Singapore’s figures have quadrupled to $1.1 billion over that time, data from the city-state’s exchange show...

...The slump in trading by individuals coincided with an exodus by foreigners from Southeast Asia’s second-biggest stock market, leaving Bursa more reliant on domestic institutional funds. Overseas investors have sold a net 1.36 billion ringgit of Malaysia’s equities this year, adding to 8.57 billion ringgit withdrawn in 2009 and 38.6 billion ringgit that flowed out in 2008, according to exchange data. In 2007, they bought a net 24.7 billion ringgit.

The exit left foreigners holding 20.6 percent of local stocks at the end of April, down from 27.5 percent in April 2007, according to stock exchange data. Overseas investors held 9.33 percent of Tenaga Nasional Bhd. at the end of April, compared with 27 percent in April 2007, according to data from Malaysia’s biggest power producer.

The state-controlled Employees Provident Fund accounts for 50 percent of daily trading volume in the equity and bond markets, Prime Minister Najib Razak said on March 30. More than half of the 417.1 billion ringgit of market value in the benchmark stock index is owned by government-linked funds, according to calculations by Bloomberg.

“We’d rather see a more balanced distribution, so that one particular sector doesn’t dominate the market so much,” Yusli said.

Retail investors’ share of trading is low by comparison with at least one neighbor, Thailand, where individuals accounted for 56 percent of turnover so far this year, according to data compiled by Bloomberg. Exchanges in neighboring Indonesia and Singapore don’t track the figures.

I can understand the argument regarding diversifying trading away from EPF. What I don’t get is why target individual investors, if trade diversification is really Bursa’s goal.

Theory suggests that the costs of diversifying portfolio risk is lower when individuals invest via unit trusts, and information costs for individuals are then relegated to just monitoring the fund manager(s) and the overall market, rather than a personal stock portfolio. Menu costs are lower as well, in terms of adjusting the portfolio mix based on market conditions. In addition, institutional funds are (supposedly) better able to handle market volatility and have a better chance to monitor and evaluate individual stocks (with some reservations).

The problem Bursa is facing is that while Malaysia does indeed have a nominally high savings rate, these savings are by private enterprises and not by households. That’s means that Bursa’s effort is probably doomed to fail, and thankfully so – given the reasons I outlined above, there’s not much benefit in aggregate for individual investors to put funds directly into the market. And I’d not be very happy if Bursa started targeting corporate savings either – investing in the stock market should not be part of corporate business activity.

Why I’m calling this a conflict of interest on Bursa’s part is because of their corporatised structure, and because of the benefits that individual investors can bring to market activity. That line about the fall in daily trading volume is key to understanding this – who benefits most from higher trade volume? Stock brokers and by extension, Bursa itself; certainly not individual investors, who tend to be market followers rather than market leaders. The fact that Bursa Malaysia is a publicly listed company and answerable to shareholders means that their incentives are highly skewed toward increasing revenue and profits, rather than safeguarding individual investor interests.

As I say, they aren’t likely to succeed, but the very fact they’re pursuing this course is disturbing.

What The KLCI Says About Economic Policy

Usually it doesn't.

Teoh Kok Lin makes that point today (emphasis mine):

"BUDGET 2010 was, shall we say, not that warmly received by the man in the street. Some pointed out that the budget gave few goodies to the rakyat or businesses compared with previous years, hence it was not as good and that’s why the stock market was down 0.5% last Monday.

I believe a slight disappointment with the budget played a small role, if any, in the stock market. However, I am perplexed how one can infer from “one-day” stock market movements whether the budget is good or not."

To be more rigorous about it, here are the stats on the log difference in daily closing for the KL Composite Index (sample: January 2000-September 2009):



The two stats of interest are the mean (0.0001) and the standard deviation (0.0096). The observations show that daily changes are approximately normally distributed somewhat more leptokurtic than a normal distribution (from the Jarque-Bera stat "peakier" with a kurtosis stat > 3), with a mean of zero:



Using a 95% confidence interval and the standard deviation of 0.0096, we get:

(1.96 x 0.0096) x 100 = 1.88%

Which means that any movement plus/minus 1.88% is just the normal daily trading range for the KLCI, and doesn't say anything at all about the budget, RPGT, credit card taxes, fuel prices, commodity prices, the US dollar, Tun Mahathir's comments, corruption, politics, or Samy Vellu's hair (or lack thereof).

Edited (changes in blue): The actual distribution of changes has a greater central tendency than a normal distribution. Thanks Hafiz!

Does Finance Create Wealth?

What’s the role of the financial sector in an economy? I came across this question the other day while vetting something (what I cannot say) and the answer was, believe it or not, “to create and maintan economic wealth”.

Stuff like this drives me bonkers.

There’s this perception, especially in the media, that finance and especially the stock market is a way of creating wealth. Sorry but that simply isn’t true, except in a narrow sense for the go-between – the banker, the insurer, the stock broker etc. The economic textbook answer of course is that the financial sector functions as an intermediary: between investors and companies, between borrowers and lenders, between buyer and seller.

Since the intermediary earns fees for this service, from an economic viewpoint this is viewed as income which can be accumulated as wealth. But the actual flow of funds that the intermediary handles does not of itself constitute wealth creation, even if one side or the other makes a profit off the transaction.

How come? Let’s take a stock market example. Say you buy shares in company A for RM1.00 a share, and later sell it for RM1.50. You’ve made a trading profit of RM0.50, and have obviously increased your wealth.

But does the aggregate wealth of the system rise? No, it doesn’t – you’ve got counterparties in each buy/sell transaction. Somebody received your RM1.00 in return for the “A” company shares, and somebody paid you RM1.50 for those same shares. In short, this is a zero-sum game – no wealth is created, it’s just passed around.

So where does this idea of finance creating wealth come from? Because the perception is that share prices tend to go up over time (at least, if you’ve invested in a good company) – hence, the monetary value of shares held by investors likewise go up.

So wealth is created right? Not exactly. Shares are nothing more than a claim on the assets and value of the business of a company. If the value of the company goes up, then the underlying value of the claims represented by the shares of the company will also go up, which usually means the share price also goes up.

But here’s the key point – wealth creation has occurred at the company level, not in the stock market. If the underlying value of a company stays pat, then anybody making a profit trading in the shares of that company did so at someone else’s expense, since the value of the claim represented by those shares has not changed.

Corporate finance exercises, M&A exercises - it doesn't make a difference. Changes in share prices due to these exercises occur because the real and/or perceived value of a company has changed. Again, the change in wealth and value have occured at the company level, and share prices just reflect that.

Zero-sum game. The same thing occurs in banking and insurance, if not quite in so straightforward a manner.

That’s why bubbles are so damaging. Because the difference between reality and perception get so large, somebody (usually the professionals) makes an obscene profit, and somebody (usually the sucker retail investor) takes massive losses. And the aftermath of bubbles typically sees underlying values fall as well, so everybody takes a further hit.

So does finance create wealth? No, nyet, nada, non, nein!

May Effect In Stock Markets: True Or False?

The Malaysia-Finance blog the other day brought up an interesting seasonal effect that I never heard of before: to wit, when investing in stock markets sell in May and go away (until October). Essentially this divides up the year into a bull period (Nov to April) and a bear period (May to Oct). Ordinarily I dont't bother much with equity market analysis – it`s not really my field – but this sort of seasonal effect is amenable to statistical testing.

Rather than doing something complicated like a seasonal ARCH model or laborious like directly calculating compound returns for each subperiod, I hit on a fairly simple way to prove the May effect (anyone feel free to tell me this is wrong). In essence I cut the daily return* data I had through using two dummy variables (E1 for Nov to April, E2 for May to Oct) which took the value of 1 for each subperiod and 0 for the opposite period. This gave me two daily return series, each with its own sample mean and distribution. All that was then required to prove the May effect was to verify that the Nov to April series had a higher mean, and that this mean was statistically significantly different from the mean of the May to Oct series.

*returns are calculated as the log difference between two trading days.

It took longer to write about than to do.

Here are the results tabulated for the markets that I have coverage for. Mean difference is the net difference between the sample means of series E1 and E2; F-stat is the value of the ANOVA F-Statistic (t-tests yielded virtually identical results); and Prob. is the threshold on the test probability distribution where the null hypothesis is not rejected (1 minus prob. gives the confidence level). The results are ordered from strongest to weakest:

^STI
Mean difference: 0.0005
F-Stat: 8.94
Prob.: 0.003

^DJI
Mean difference: 0.0003
F-Stat: 8.24
Prob.: 0.004

^TWII
Mean difference: 0.0008
F-Stat: 6.97
Prob.: 0.008

^JKSE
Mean difference: 0.0009
F-Stat: 6.75
Prob.: 0.009

^GDAXI
Mean difference: 0.0005
F-Stat:F-Stat: 5.22
Prob.: 0.022

^FTSE
Mean difference: 0.0003
F-Stat: 5.15
Prob.: 0.023

^IXIC
Mean difference: 0.0003
F-Stat: 4.85
Prob.: 0.028

^N225
Mean difference: 0.0004
F-Stat: 4.45
Prob.: 0.035

^KLCI
Mean difference: 0.0005
F-Stat: 4.42
Prob.: 0.036

^GSPC
Mean difference: 0.0002
F-Stat: 4.23
Prob.: 0.040

^KS11
Mean difference: 0.0007
F-Stat: 3.51
Prob.: 0.061

^SSEC
Mean difference: 0.0007
F-Stat: 2.08
Prob.: 0.150

^AORDS
Mean difference: 0.0002
F-Stat: 1.99
Prob.: 0.159

^HSI
Mean difference: 0.0002
F-Stat: 0.81
Prob.: 0.370

^BSESN
Mean difference: 0.0001
F-Stat: 0.06
Prob.: 0.800

Quite a few surprises here, although I'd encourage anyone to read through the caveats before taking any of these conclusions at more than face value. First though is that the May effect appears to be pervasive – two thirds of the 15 markets covered here have better than a 95% chance that the May effect is true. The second surprise is that developing markets are as likely as developed markets to exhibit the May effect. The third surprise was the difference in probabilities for the Dow Jones Industrials and the broader S&P500, though I suspect the difference here is that less of the S&P500 counters are within the investment universe of investors.

Now for the caveats - the sample sizes for each index is different, with the SSEC the shortest at just four years. Most of the rest date back to the 1990's, although the developed country indexes go back further (US markets are from 1970). The impact of this is that for the short sample indexes, the degree of the May effect is less certain. That also makes the ordering that I've done here much less reliable than I would like. One other related problem here is that I've only covered a small sample of the available markets, and a larger sample might reach different conclusions.

In summary though, what's clear is that if you're thinking of trading on the basis of the May effect, you're likely to end up in the money – but you have to be careful and confirm that there's a historical basis for it in the market you're in. There's no substantive dividing line between developing and developed markets here. You should also be aware that the difference in yield between markets of the May effect can be strikingly different – it might not be worth the trouble, especially if you have a mandate that requires a certain level of constant exposure to equities.