This article first appeared in Capital, The Edge Malaysia Weekly on April 24, 2023 - April 30, 2023

DESPITE softness in the equity market, online brokerage Rakuten Trade Sdn Bhd sees opportunities. It is now vying for a slice of Malaysians’ investing dollars by offering first-time investors new trading capabilities and access to Bursa Malaysia and overseas markets at a fraction of what its peers are charging.

Rakuten Trade recently reinforced its position as the country’s cheapest online broker by reducing its brokerage fees to RM1, from RM7 previously, for transactions of up to RM699.99 on Malaysian, US and Hong Kong stocks as it bets that a new niche of young, inexperienced investors will feel the thrill of investing from its online trading platform. The fee increases to between RM9 and RM100 of the value of the trade thereafter, depending on size.

Starting May 15, the online brokerage — a 50-50 joint venture between Kenanga Investment Bank Bhd (Kenanga IB) and Japan’s Rakuten Securities Inc — will also offer another benefit to its users, allowing them to buy US stocks, American Depositary Receipts or US exchange-traded funds in fractions of a share rather than needing to have enough cash to buy a full share.

Describing Rakuten Trade as a challenger company, CEO Kazumasa Mise says: “We are lowering the bar to trade, and deploying significant changes to our services in a way that we hope will stimulate online trading and boost retail participation, especially among new investors.”

He notes that Rakuten Trade will be the first brokerage in Malaysia to offer fractional trading for US stocks.

According to Mise, Tesla, Apple, Alphabet and Amazon are four of the most popular companies among investors on the Rakuten Trade online trading platform today.

“However, to own just one share of Apple, we need to fork out US$165. This is equivalent to about RM700, which just isn’t possible for retail investors with a smaller disposable income. With fractional trading, customers can purchase 0.01 units of Apple shares, which would only cost US$1.65 or about RM7. This may encourage investors to invest in US stocks. Also, we have cut the brokerage fees to trade,” he tells The Edge in an interview.

The online brokerage launched its foreign trading of US stocks in January 2022 and Hong Kong stocks in December the same year, but some quarters have highlighted shortcomings such as the absence of fractional share trading, short selling, margin trading and a lack of an order execution feature.

According to Mise, the company has no plans to introduce margin trading and short selling in US stocks for the time being as it believes that these are more suitable for sophisticated investors. “About 80% of our customers have less than three years’ experience in stock trading. Additionally, we are targeting investors just starting out and/or have a smaller disposable income.”

However, it is mulling introducing the market order execution feature, which would allow investors to buy or sell shares immediately at the current price. “We are thinking about it right now. We may introduce it this year — I cannot promise, but we will think about it,” says Mise.

To retain customers, Rakuten Trade has also recently revised its rewards programme structure by giving investors one RT point for every RM1 spent on brokerage fees, from RM2 previously. Investors can use them to get a RM1 brokerage rebate for every 100 RT points.

The move comes as retail trading activity returns to pre-pandemic levels after a 2020-2021 peak when people were largely stuck at home during the Covid-19 lockdowns. The period saw Rakuten Trade making its maiden profit in the financial year ended Dec 31, 2020 (FY2020), after three years in operation.

Companies Commission of Malaysia (SSM) data shows that Rakuten Trade registered a net profit of RM17.62 million for FY2020 compared with a net loss of RM16.26 million for FY2019. Rakuten Trade continued to rack up profits in FY2021, although net profit fell by 17.7% to RM14.5 million from a year earlier. Revenue grew 4.7% to RM58.86 million in FY2021 from RM56.2 million the year before.

In 2020, there was even talk of Rakuten Trade planning to launch an initial public offering but that did not happen.

While Rakuten Trade has yet to file its financial statements for FY2022 with SSM, Mise says 2022 was a tough year for the brokerage, owing to weakness in the stock market. He declined to disclose whether the company continued to generate earnings for the year.

Last year, the stock market was hit by sustained foreign investor selling as capital flowed from emerging markets to the safety of the US due to global economic uncertainties partly caused by the Russia-Ukraine war and aggressive rate hikes, compounded by concerns of economic recession. In announcing its full-year FY2022 results on Feb 24, Kenanga IB said trading volume on Bursa declined by 49.1%, while trading value contracted by 40.8% last year. Against this backdrop, Kenanga IB still managed to maintain its position as the country’s largest retail stockbroker, with a retail market share of 27%, up from 24.2% in 2021.

“This year, the market has recovered slightly. Nevertheless, we (Rakuten Trade) are not only a trading platform provider, but also an educator for Malaysians to start investing. Once they are educated, when the market comes back, they can start trading,” says Mise.

He points out that the brokerage has activated more than 30,000 trading accounts for its US and Hong Kong trading services within one year. “We hope that with the fractional share offering for US stocks and lower brokerage fees, it will encourage more investors to set up a brokerage account with us to trade in Bursa or US stocks. Perhaps retail customers of the traditional brokers will continue to use them because our targets are those who are just starting to trade. Also in Rakuten Trade, there are still some investors who have opened an account but have not yet started trading.

“Since we launched the US trading service, a lot of young investors have started trading but very interestingly, 90% of them are already trading on Bursa. The top trading Bursa stocks on Rakuten Trade’s online trading platform are Malayan Banking Bhd, Public Bank Bhd and Capital A Bhd,” he adds.

As at end-March, Rakuten Trade had activated more than 260,000 accounts and handled almost RM115 billion in total trading value since starting its operations in May 2017. Its clients’ assets under administration were over RM3.7 billion.

However, Mise points out that investors’ interest in trading Hong Kong securities through its trading platform is lower than that in US securities. Thus, it will organise free educational webinars around a topic — whether it is related to the trading of Hong Kong-listed stocks or the outlook for Hong Kong’s stock market. “We are still focused on education because customers always tell us that they need more Hong Kong market information. From this month, we will start offering clients free webinars to explain what is the market condition and what kind of shares are invested in Hong Kong, among others,” he says, noting that Alibaba Group Holding Ltd and Bank of China Ltd are some of the popular Hong Kong-listed shares among Malaysian investors on Rakuten Trade.

On whether the brokerage plans to expand its foreign trading offerings to other markets, Mise says: “At this moment, we are focusing on the US and Hong Kong markets.”

A remisier with a local brokerage, who asked not to be named, says the lowering of the minimum brokerage fee to RM1 may boost trading activity up to a certain extent, especially on penny stocks.

“Still, at the end of the day, regardless of existing or new retail investors, whether they will continue to be incentivised to trade will depend very much on whether they can make money from the stock market, which in turn is dependent on the prevailing market conditions,” he says.

The remisier believes the low brokerage rates will more likely attract the younger and more technology savvy retail investors, who plan to do self-trading, to open accounts and trade with Rakuten Trade. “Beyond this group of retailers, some investors will still prefer to trade or invest through traditional brokers who can offer one-to-one investment advisory services and a T+3 payment schedule (instead of cash upfront payment).”

The remisier is also of the view that the introduction of fractional shares will, to a certain extent, make investing in US stocks more attractive to retail investors “as this can make some US shares — which are trading at high absolute prices — more affordable to retailers”.

Meanwhile, Malaysia’s stock market has regained some lost ground so far this year, says Mise. The FBM KLCI was down by a marginal 2.7% year to date to close at 1,434.90 points last Monday.

According to Rakuten Trade head of research Kenny Yee, the local stock market could see an uptick in the second half of this year as foreign funds return to emerging markets in Asia.

“There is still considerable uncertainty in the US, but the Asian region is in a bright spot amid the gloomy global outlook. We should see some improvements as global funds begin to diversify their portfolio elsewhere. These funds have been enjoying themselves within the same playground in the US over the past years,” he tells The Edge.

“The stock market thrives on liquidity. When these funds come into Asia, some of it will spill into Bursa. Naturally, we will see some of the liquidity flow back into the smaller-cap stocks. This will help attract more retail investors’ participation in the local market,” he adds.

Yee says the downside risks to the outlook are largely external, such as persistently high inflation and the recent bank collapses in Europe and the US weighing on activity.

“For us in Asia, we are pretty well sheltered because Asian markets have been ignored by these funds for so many years. That’s why in terms of valuation, we are at a historical low at the moment,” he notes.

Yee anticipates the FBM KLCI touching 1,630 points by end-2023 based on a 15.5 times price-earnings ratio compared with its historical PER of around 13 times. The benchmark index has been trading at a 52-week range of 1,372.57 to 1,615.17.

He likes companies in the banking and telecommunications sectors. “Telcos have been ignored for so many years, and so can be good valuation plays, and if things go according to plan, maybe the construction sector.”

Bursa’s financial services index was down 4.4% over the last 12 months, closing at 15,765.59 points last Monday, while the telecommunications and media index was down 2.9% to settle at 618.83 points during the same period. 

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