Middle Child Syndrome

by ANAND PATHMAKANTHAN 

IT IS never fun to be middling, especially in the investment world. Malaysia’s consecutive years of equity-market underperformance are a result of both success (to have achieved middle-income status) and failure (to now appear to be wallowing in the quintessential “middle-income trap”). 

When investors consider Asean, they have tended to gravitate to the still-emerging markets of Indonesia, the Philippines and Vietnam (where large, under-geared and increasingly wealthy populations promise years of robust growth) or the uber-developed and ever forward-looking regional financial centre that is Singapore. 

While 2022 was an okay year in terms of foreign-equity fund flows — Malaysia attracted a net +US$1.1b (RM4.79 billion) (after Thailand’s +US$6 billion and Indonesia’s +US$4.3 billion), a similar amount as Vietnam — foreigners have net sold a cumulative US$31.7 billion since early-2010. 

Stagnating returns have also pushed domestic institutions (DIs) to seek better returns offshore — DI’s net sold RM6.5 billion last year, after having sold RM9 million in 2021, and empirical feedback indicates such outflows will continue. 

In short, Malaysia appears in dire need of getting its investor mojo back. That is unlikely to be achieved by building another grandiose skyscraper or mulling ECRL (East Coast Rail Link) 2.0 — instead, the new government would be better served tightening up on the basics of effective governance and expeditious policy-making. 

One priority should be to reverse the decade-long decline in domestic direct investment (DDI), the less glamorous but more important companion to FDI (foreign direct investment), by creating the conditions necessary for Malaysian corporates to want to (re)invest domestically. 

Speedily resolving bottlenecks such as access to foreign labour (both skilled and unskilled) and long-pending approvals — such as that for MAHB’s (Malaysia Airports Holdings Bhd) RAB (Regulatory Asset Base)-based Operating Agreement and Westports Holdings Bhd’ expansion plan to double its handling capacity — would be win-wins. 

Government-linked corporates’ (GLC) reform aimed at narrowing the profitability / ROA (return on assets) gap with privately-owned peers is another long-overdue market and macro imperative. A second GLC Transformation programme paired with more activist GLIC (government-linked investment company) controlling shareholders could be the ticket. 

Our current top picks in the GLC space are Telekom Malaysia Bhd (cost efficiency), Axiata Group Bhd (regional recovery), MAHB (reopening) and RHB Bank Bhd (yield). 

  • Anand Pathmakanthan is the Malaysia and regional head of equity research at Maybank Investment Bank Bhd. This note appeared in the bank’s recent research report. 

  • This article first appeared in The Malaysian Reserve weekly print edition