Malaysia, in fact, is outperforming other emerging economies in the development of its capital market.
However, investors lack avenues to deploy domestic savings and they face poor risk-adjusted returns on capital market products, mainly because of higher volatility, according to a report by McKinsey.
This could mean that there would be many retirees with less money as they age, said the international management consulting firm. .
The Edge reported that Malaysia scored 3.25 out of 5 in the development index, ranking 5th in the list led by Japan (4.0), followed by Australia (3.95), South Korea (3.45) and Singapore (3.40),
Among the plus points for Malaysia are: issuers have access to sufficient debt and equity financing, there is predictable funding from foreign institutional investors, the real cost of equity and debt is quite competitive, and investors get a good mix of equity and debt investment opportunities.
The Edge quotes one of the report’s co-authors, Joydeep Sengupta, as saying: “Malaysia offers attractive avenues to deploy short-term domestic savings and a deep market in terms of investment opportunities available. However, the ability to raise long-term debt is a critical element in establishing truly well-functioning capital markets.”
“They (the investors) put a large part of their savings in physical assets like real estate and gold, and bank deposits. The limited investments in financial assets are mostly in government bonds, AAA-rated corporate bonds, and equities,” McKinsey said in its recently released report entitled “Deepening capital markets in emerging economies”.
They also get poor risk-adjusted returns on capital markets.
“The inability to match long-term savings with future pension and health requirements, combined with ageing populations, risks creating a generation of poor retirees,” McKinsey said.
The Edge quoted Sengupta as saying in an email interview that Malaysia had the deepest capital markets in equities, government and corporate bonds, especially Islamic sukuk bonds, among emerging economies.
“However, it lacks a mature securitisation market, with few offerings for long-tenure products to domestic investors, and faces high volatility in equity market returns.”
Sengupta, the managing partner of Asia-Pacific Banking Practice at McKinsey, said Malaysia was not faring too well in terms of the quality of pricing information it provided as it was ranked 17th or “inefficient”, ahead of only Vietnam, Pakistan and Chile, among 20 countries weighted.
Pricing information from capital markets offered a useful indication for the allocation of financial resources to the most attractive sectors in the economy, said Sengupta.
“Malaysia has fared less well in this parameter as capital markets pricing does not effectively differentiate performance of attractive sectors in the country, partly due to a current insufficient breadth of investors.
“Our experience suggests this could be addressed through greater access to a wide variety of investors with differentiated investment philosophy and capabilities, who could appropriately price assets especially in ‘new’ sectors like technology. Managing government fiscal deficit would also help to ensure investments in the private sector are not crowded out,” The Edge quoted him as saying.
He suggested that if Malaysia were to enact and enforce improved market architecture and foundational policies, it would help to create an environment for improved investment opportunities.