This article first appeared in Forum, The Edge Malaysia Weekly on April 1, 2024 - April 7, 2024

Between 2000 and 2012, the Malaysian capital market grew at a compound growth rate of close to 11%, indicating the private sector’s healthy appetite for using it to raise funds for business expansion.

However, between 2013 and 2023, the capital market grew by less than 4%. The reason for the significantly lower growth rate is that while the value of the bond market grew every year, the equity market was stagnant, showing no growth.

The capital market consists of two segments — the bond and equity markets. As with other developing capital markets, the bond market tends to become bigger than the equity market over time.

This is because as the economy grows and the proportion of mature businesses gets larger, they tend to borrow more from the bond market, where the costs are lower compared with raising funds through the equity market. Hence, it’s only natural that the size of the bond market will eventually be bigger than the equity market.

In Malaysia’s case, the bond market has seen steady growth, having doubled in the last 10 years. Its size was RM1 trillion in December 2012. At the end of 2023, it was RM2 trillion and growing.

The equity market, however, has remained stagnant. In 2013, it was RM1.7 trillion. Based on the Securities Commission’s (SC) latest annual report, its size is still RM1.7 trillion. Essentially, the equity market has been hovering around the same value in the last 10 years.

In comparison, the world’s most vibrant equity market, which is the US, has seen tremendous growth since the financial crisis in 2008. The market capitalisation of the S&P 500 index, which covers about 80% of the listed companies, is now at US$45 trillion (RM212.8 trillion).

In 2013, it was US$14.5 trillion. This represents a growth of more than three times over the last 10 years.

The SC and Bursa Malaysia, which are responsible for promoting the capital markets, have been attempting to get more companies to list on the local bourse. But the task is becoming increasingly difficult.

Malaysia is not alone in facing challenges in building up its equity market. The other countries in the region encounter the same problem of being unable to grow their equity market relative to the US, London and Hong Kong financial centres.

Generally, companies list in countries where their businesses fetch the best valuations. That is why destinations such as the US and London are favoured for raising capital. Hong Kong used to be a favourite in Asia but is losing out to Singapore due to the China factor.

However, not all companies can be listed in established financial centres where there are funds with deep pockets prepared to fork out big money to own a slice of high-growth companies. Markets such as Malaysia are the second choice.  

Naturally, Malaysian companies tend to get higher valuations on their home ground. Apart from being able to raise the highest amount of funds at home, the companies also choose to list locally where they are comfortable with the operating environment.

They are familiar with the laws that dictate businesses, government policies that ease the cost of doing business and stable political environment that allows for certainty in decision-making and fosters commitment to long-term investments.

However, the political risk premium has heightened over the years. It has come to a stage where a simple matter relating to business can be turned into a racial and religious one.

The KK Super Mart issue is an example. The convenience store chain became the subject of controversy after socks with the word “Allah” were found on display at one of its outlets. There was no let-up despite an explanation and public apology from the owner.

Umno Youth leader Dr Muhamad Akmal Saleh is leading the charge against KK Super Mart, and his actions have been endorsed by the party.

The KK Super Mart incident is not the first where racial and religious sentiments have had an impact on businesses that are domestically oriented. Last month, Tan Sri Vincent Tan, who is Berjaya Food Bhd’s major shareholder, appealed to consumers to consider whether anyone benefits from a boycott of Starbucks Malaysia over the war in Gaza.

The latest call for a boycott is from the Malay rights group Perkasa against Petroliam Nasional Bhd (Petronas) for awarding the installation of solar panels to a non-Malay company. Petronas has defended its decision, stating that the award was based on a competitive tender.

Even the outcome of a general election can be analysed based on race and not the issues at hand.

In 2013, the then prime minister Datuk Seri Najib Razak blamed the poor performance of Barisan Nasional on a “Chinese tsunami”. Some nine years later in 2022, a “Malay tsunami” emerged, which resulted in the rise of the fundamentalist PAS and its partner, Bersatu, a break-away party of Umno.

Incidentally, 2013 is the year when the equity market entered a stagnation phase. And it has continued even after two more general elections have concluded.

The calls for boycotts have affected the profits of Berjaya Food and may impact the operations of KK Mart too. However, the chances of these companies going under are remote.

Starbucks is in many office buildings and is frequented by the younger crowd. As for KK Mart, it has overtaken 7-Eleven as the most popular 24-hour convenience store. Consumers will continue to patronise Starbucks and KK Super Mart. It will take time but things will eventually recover.

But what cannot be erased is the overexuberance of politicians in capitalising on issues involving race and religion. That leaves a scar on investors.

After the recent incidents, it is easy to fathom why the equity market is in an appalling state of affairs.

M Shanmugam is a contributing editor at The Edge

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