Introduction

Like most nations across the globe, the COVID-19 pandemic, coupled with strained trade relations, have had an undeniable impact on the capital markets sector in Malaysia.

As the pandemic rages on, industry insiders have had to adopt an introspective approach, to take stock of the underlying foundations of the market as a whole and put in place measures to negate the effects of an increasingly volatile global market that is perched on a knife’s edge.

The Movement Control Order (MCO) initiated by the Malaysian government as a means to combat the spread of the virus, resulted in an inevitable decline in national economic activity, with Real GDP contracting by 17.1% y-o-y in Q2 2020. In addition, the FBMKLCI dropped by 24.3% from January to mid-March 2020, the lowest level since the global financial crisis in 2008 – 2009 whilst portfolio funds outflows in both equities and bonds totalled RM 34.1 billion from February to March 2020 as a result of intensified selling.

Thankfully, a myriad of proactive domestic policy initiatives spearheaded by the government and relevant authorities have helped to hold down the fort and inoculate the nation’s capital market sector against the most damning effects of this global pandemic.

According to the Securities Commission of Malaysia (SC) Annual Report 2020 released in March 2021, assets under management of the fund management industry actually expanded by RM 82.3 billion to RM 905.5 billion in December 2020. In keeping with this theme of steady recovery, portfolio inflows began recovering from June 2020 onwards, with total non-resident inflows amounting to RM 24.4 billion from June till the end of the year. Total funds raised in the equity market also rose from RM 6.6 billion in 2019 to RM 10.0 billion in 2020, RM 2.0 billion of which was raised via initial public offerings.

Whilst pre-pandemic forecasts have long since been relegated to the trenches of inconsequentiality, slivers of optimism do remain as a result of the encouraging resilience of the Malaysian market throughout these testing times.  A slew of potentially lucrative opportunities and heartening trends have also emerged, signalling a market in the midst of recovery.

In line with an increase in global demand, Malaysia’s equity capital market is expected to be invigorated in the coming months as a result of ample liquidity, continued fiscal spending as well as favourable monetary policies.

Overall, certain industry sectors such as healthcare and technology unsurprisingly outperformed the rest in 2020.  Factors such as digitalisation, adoption of technology as well as the need for dynamic regulation, governance and risk management have emerged as key drivers for the Malaysian equity market moving forward.

Regulatory Relief Measures to Ensure Stability

To mitigate the risks arising in the wake of the pandemic, the SC has put in place measures to stabilise the equity market in Malaysia and ensure the smooth functioning of the sector during these trying times.  There has been greater emphasis on monitoring of trading activities, including the effect of the pandemic on the overall capital market infrastructure.

Short selling activities were temporarily suspended from March to the end of April 2020, with a further suspension extended to end of June 2020, and subsequently December 2020. The extended suspensions ensured that excessive speculative activities and downside risks were appropriately managed and monitored. This in turn allowed savvy investors the chance to rationalise investment decisions in spite of market volatility.

Local authorities have also been committed to ensuring the continuous monitoring of Clearing and Settlement Capacity. There has been a contentious push for Bursa Malaysia Securities Clearing (BMSC) and Bursa Malaysia Derivatives Clearing (BMDC) to efficaciously manage settlements and clearing risks for the securities and derivatives markets. Regular stress tests were conducted by BMSC whilst revisions were made to the derivatives clearing fund and margin rates or future products.  As at December 2020, the derivative clearing fund stood at RM 37 million as a result of the growing contributions from BMDC as well as market participants.

In addition, on 18 April 2020, the SC issued a guidance note to enable the utilisation of fully virtual general meetings and meetings of unitholders. This was a necessary step forward in light of the MCO, which allowed flexibility on the timing of annual general meetings and in the issuance of annual reports. There was a total of 888 listed issuers conducting 1,017 general meetings at the point of issuance of the guidance note.  Current circumstances have accelerated the need for adoption of digital tools to conduct general meetings. In the SC Annual Report 2020, 17 out of the 29 listed issuers who opted for remote shareholder participation stated that they will continue to do so in future.

Crucially, there was also a concerted effort to ease compliance for listed issuers and facilitate fundraising in a timeous and cost-effective manner. This included listed issuers being granted a 50% rebate on annual listing fees for 2020. Notably, there was also a 12-month waiver of listing-related fees for companies seeking listing on LEAP or ACE Markets. In efforts to boost fundraising, issuers were also granted permission to issue abridged prospectuses without prior lodgment with the Companies Commission of Malaysia.

Bursa Malaysia further announced relief measures on 26 March 2020 to relax some of their Listing Requirements, which were pivotal in providing temporary relief to issuers financially distressed by the pandemic. The SC also brought to the fray flexibilities for those involved in take-over activities. This entailed the digitalisation of the take-over process, as well as the acceptance of electronic communications to shareholders and electronic payments of cash consideration.

All these measures have effectively stabilised the equity market in Malaysia and have aided in protecting the sector from rampant market volatility. The pandemic containment measures have also necessitated assessment of listed issuers for resilience and integrity.

Local authorities have taken a proactive approach towards emboldened supervisory focus and risk management. Adoption of a data driven and analytical approach has been intensified in recent months leading to swift and calculated decision making on the safeguarding of the capital market in Malaysia.

Opportunities and Trends

The smooth running and proactivity of the capital market sector serve as an anchor to the buoyancy of the Malaysian economy. Crucially, efforts to increase access to the capital market via technology adoption have intensified. Efforts were taken to mitigate the lower demand from investors due to uncertainties in the alternative market. Additionally, there were liberalisation measures to increase the size of fundraising rounds, including raising the single lifetime fundraising limit for RM 5 million to RM 10 million per issuer as well as broadening the scope of eligible equity crowdfunding (ECF) issuers to companies with up to RM 10 million in paid-up capital from the initial RM 5 million.

The SC also introduced the Guidelines on Digital Assets on 15 January 2020, which allowed all offerings of digital tokens in Malaysia to be carried out only through an Initial Exchange Offering platform registered with the SC. Additionally, the framework for the e-services platforms within the Guidelines on Recognized Markets permits platforms such as e-payment platforms, e-commerce platforms and e-wallets to partner with CSML holders to distribute capital markets products. The SC further approved three additional digital investment companies in 2020 which will hopefully provide more value-added options for investors.

In line with the adoption of digital technologies in the capital market, the Shariah Advisory Council has resolved in July 2020 that it is permissible to invest and trade in digital currencies.

Furthermore, the SC has entered into a new Fintech Bridge agreement with the Indonesian financial regulator in August 2020. The adoption of technology and digitalisation have emerged as one of the key drivers of the capital market sector. To provide investors with a fully digital onboarding experience, it is strongly recommended that industry insiders enable non-face-to-face verification mechanisms as well as facilitate the online opening of CDS accounts.

Outlook for 2021

Global economic prospects are expected to be on the path to recovery in 2021. This, will  understandably, depend largely on the success in containing the pandemic, and speed of deployment of vaccines globally.

Whilst the Malaysian economy is expected to receive a shot in the arm in 2021, the progress of economic recovery is prospected to be uneven across specific sectors. Prolonged low-interest rates will adversely impact stretched valuations in more risk affected asset markets.  Downside risks to growth remain as a result of the advent of new variants of the coronavirus.

That being said, domestic demand will inevitably recover gradually and the Malaysian capital market is expected to play a crucial role in driving the local economy. It is expected the domestic capital market will remain resilient throughout 2021 as a result of the nation’s strong macroeconomic fundamentals, domestic liquidity and strengthened infrastructure.

It has become clear during this pandemic that adoption of technology and digitalisation will remain key drivers for those seeking to prosper in the Malaysian capital market.

Progressive and forward-thinking organisations will have a lead on adapting to the current circumstances and prospering during these difficult times.

It is expected that further fiscal stimulus and continued support from retail investors will help drive the domestic equity capital market in 2021.

In many ways, the Malaysian market outperformed expectations in 2020, and such resilience bodes well for the general outlook of the domestic economy for 2021.

Additionally, it is expected that there will be no further cut in the overnight policy rate by Bank Negara Malaysia which would be greatly beneficial to domestic banks. Much of course will depend on the speed of global vaccination rollouts, as well as the upward progress of key economic growths in East Asia.

The resilience of the domestic market is significantly due to the steady growth and stability that the Malaysian debt capital market has seen in recent years.  According to the SC, for 2019, debt securities outstanding and equity market capitalisation stood at RM1.5 trillion and RM1.7 trillion respectively. For 2018, debt securities outstanding and equity market capitalisation stood at RM1.4 trillion and RM1.7 trillion respectively. This has allowed the domestic market to remain, to a certain degree, impervious towards the ravaging socio-economic effects of this global pandemic. While global market volatility is likely to persist, these foundations coupled with a prolonged period of low-interest rate environment, will create positive growth.  This is evidenced by the domestic capital market sector experiencing a higher rate of fundraising activities throughout the year.

Alternative fundraising avenues have also continued to gain traction, especially in ECF and peer-to-peer financing, with total funds raised more than doubling to RM443.8 million (2018: RM195.9 million).

Whilst much depends on the effective dissemination of the vaccine and global trends, there is great reason for optimism, as the Malaysian economy steadfastly resumes its path of recovery.

Opportunities are abound with regards to equity crowdfunding and peer-to-peer fundraising options. The insistence of the local authorities to engage with key stakeholders within the industry, bodes well for the overall outlook of Malaysian capital markets. Whilst challenges remain, there are tangible opportunities for savvy investors seeking to emerge from the mire and take proactive steps towards recovery.

If you have any questions or require any additional information, you may contact Stephanie Choong or the Zaid Ibrahim & Co. partner you usually deal with.

This alert is for general information only and is not a substitute for legal advice.