This article first appeared in The Edge Malaysia Weekly on June 20, 2022 - June 26, 2022
In our article last week, we wrote about the chronic underperformance of Bursa Malaysia, which is, in turn, a reflection of the country’s underlying economic fundamentals. This all began after the Asian financial crisis (AFC), when Malaysia implemented the currency peg (to the US dollar) and capital control measures. We provided irrefutable data as evidence of how this strategy drastically impacted subsequent investments by both foreigners and Malaysians. We showed the sharp increase in capital outflows by domestic corporates, institutions and individuals after control measures were relaxed.
We have repeatedly linked investments to job creation, higher productivity and wages, stronger profits and, therefore, better stock price performances. The years of weak investments in Malaysia caused not only premature de-industrialisation, but also hampered the country’s move up the value chain. This, in turn, led to the lack of high-paying jobs — resulting in weak purchasing power, overleveraged households, unaffordable housing and low savings. Malaysia is stuck in a vicious cycle.
While total investment is critical, foreign direct investment (FDI) is key for developing countries — in terms of new technology, transfer of knowledge and expertise and human capital development, research and development, the opening of new markets, being a part of global supply chains and so on.
This week, we take a deeper dive into the FDI statistics. Some have argued that with the emergence of large economies such as China and India, it is inevitable that Asean will become increasingly marginalised in attracting investor money. Is this truth or myth?
Truth: Competition for FDI is intense with more countries vying for a share
It is true that competition for investor money is becoming increasingly intense with more and more countries vying for a piece of the pie. From a global perspective, Asia has been — and remains — the premier destination for FDI, outside of the developed world (primarily the US and Europe). Asia’s share of FDI has been expanding rapidly, particularly after the 1990s (see Chart 1). And yes, this is due, in large part, to China.
The country — and Hong Kong, which was a key gateway to the mainland in those early years — saw a sharp spike in FDI through the 1990s, following the opening up of its economy and market-oriented reforms initiated by Deng Xiaoping. Capital inflows accelerated further after its inclusion into the World Trade Organization in 2001. Eastern Asia, which includes China, South Korea, Taiwan, Hong Kong and Japan, accounts for the biggest share of FDI flowing into Asia. And more recently, in the last 15 years or so, Southern Asia — led by India — saw a strong pickup in FDI (see Chart 2).
False: Asean is losing out
So, yes, emerging Asian countries created a lot of competition for investments. But notably, Southeast Asia (Asean, plus Timor-Leste) continues to be an investor favourite. It was one of the fastest growing and dynamic regions in the world in the 1980s-1990s — up till the AFC in 1997. In the immediate aftermath of the AFC, FDI into the region fell — but foreign capital inflows have since regained significant momentum, particularly in the past decade. Asean is now the second largest destination for FDI in Asia, behind only Eastern Asia. In other words, it is largely a myth that Asean has lost out in terms of FDI due to greater competition (see Charts 2 and 3).
Fact: Malaysia is the biggest loser in competition for FDI
Asean continues to attract increasing amounts of FDI. It is Malaysia that is the biggest loser, among all Asean countries, in this competition for foreign investor money. In the 20 years prior to the AFC (1977-1997), Malaysia accounted for 24% of total FDI flows into the Asean region, second only to Singapore. In the two decades after the AFC (2000-2020), Malaysia’s share of investments has fallen to a mere 8%, behind not only Singapore, but also Indonesia and Vietnam (see Chart 4).
Malaysia saw the steepest decline in terms of share of FDI, falling a hefty 67%. By comparison, Indonesia’s share fell by less than 8%, from 13% of total Asean FDI to 12% over the same period. Thailand’s share of the pie contracted by 36%, from 11% to 7% of total FDI in the region. Even the Philippines fared better, with its share falling some 33%.
Unsurprisingly, Vietnam recorded the strongest increase, up 80% from only 5% to 9% share, albeit from a smaller base, in the past 20 years. But the biggest winner by far, in absolute terms, is Singapore. The country accounted for well over half (55%) of total FDI flow into Asean, up by more than 41%, from 39% share pre-AFC. We will delve deeper into why we think Singapore is so successful and the impact of this massive flow of capital has on its economy and the people in a future article.
We touched on the cascading impact of this sharp drop in investments on the Malaysian economy last week. Next week, we will look at some comparable statistics for the region. The data, we believe, will show that investment is the key driving force behind improvements in living standards.
The Global Portfolio fell 6% — but better than the MSCI World Net Return Index’s 8.1% drop — for the week ended June 15, as the US-led selloff in stocks continued amid accelerating inflation. All the stocks in our portfolio ended in the red last week. Airbnb (-18%), Yihai International Holding (-8.8%) and Apple (-8.5%) were the biggest losers. We disposed of our holdings in Bank of America and Postal Savings Bank of China and will reinvest the proceeds into three regional banks. Last week’s losses pared total portfolio returns since inception to 27.1%. The portfolio is still trailing the benchmark’s 31.3% returns over the same period.
The Malaysian Portfolio fell 2.7% last week, but it was better than the benchmark FBM KLCI, which lost 4.3%. There was no gainer in our portfolio. The worst performers were Velesto Energy (-8.0%), Kuala Lumpur Kepong (-5.7%) and Telekom Malaysia (+4.2%). Last week’s losses pared total portfolio returns to 125.7% since inception. Nevertheless, this portfolio is still outperforming the benchmark index, which is down 20.3%, by a long, long way.
When analysts skip facts and reasons to be propagandists
Analysts at JPMorgan Chase did an about-face, turning positive and upgrading their calls on Chinese stocks, including Tencent and Alibaba, barely three months after proclaiming them “uninvestable”. That earlier controversial call triggered a Chinese tech rout and blowback for the bank.
Since then, the Chinese stocks have largely outperformed US markets. Indeed, we disposed of some of our US stocks and acquired China-based stocks in the Global Portfolio in mid-April — and our investments in the latter group have done comparatively better.
The chart below shows the diverging performances of the Hang Seng and Shanghai Composite indices from the S&P 500 and Dow Jones Industrial Average.
As we have said before, and will say again, narratives always follow the market.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
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