Five-year plan for a progressive and inclusive market
The Securities Commission Malaysia (SC) launched its third Capital Market Masterplan (CMP3) last Tuesday, Sept 21, during a time of turbulence and unprecedented disruption. Against this backdrop, the SC has developed a five-year framework for a more inclusive market and a shared journey of recovery as Malaysia rebuilds with a focus on enabling the economy to emerge fitter and stronger. The goal is to transition into a high-income, inclusive and sustainable nation.
Focused on the next developmental phase of Malaysiaâs capital market, CMP3 (2021â2025) affirms that the capital market needs to reset in order to progress. CMP3 envisions a capital market that is inclusive and diverse, mobilising capital efficiently for more segments of the economy, and with better regulatory outcomes. Technology will be embraced as a key enabler, ensuring the market will be relevant to more, creating value for all participants.
At a recent roundtable to discuss the aims and ambitions of the CMP3, the call was for a capital market that benefits each and every one of us. As stakeholders and investors, how do we prepare and be ready for the evolution of new business models and market structures that will emerge, shaping the landscape in financing and investing?
The participants of the roundtable were SC chairman Datuk Syed Zaid Albar, Permodalan Nasional Bhd (PNB) president and group chief executive Ahmad Zulqarnain Onn, Maybank Kim Eng CEO Datin Ami Moris, distinguished fellow and former regulator Tan Sri Andrew Sheng, PwC Malaysia executive chairman Datuk Mohammad Faiz Azmi and Kumpulan Wang Persaraan (Diperbadankan) CEO Nik Amlizan Mohamed. The Edge Communications publisher and group CEO Datuk Ho Kay Tat moderated the discussion.
The big picture
Datuk Ho Kay Tat: What are the global megatrends, especially post-pandemic, that will shape the future role of capital markets to fund the growth of companies globally? And what will those trends mean for Malaysia?
Tan Sri Andrew Sheng: The big picture is very complex and it gets more complex every day. First, everybody is worried about the US-China geopolitical rivalry.
Secondly, rich countries are ageing very fast and their savings are moving to emerging markets. I think that is a very good long-term cycle, particularly for countries like Malaysia.
Thirdly, there is quantitative easing; central banks are printing money, which added US$9 trillion worth of liquidity last year, pushing the US markets to a record high â it has been going up in the last eight months.
Fourthly is technology. Technology stocks have been doing well the last three years, unlike traditional stocks. Some of them have recovered, but everybody is looking at business models post-pandemic.
Then, of course, there is climate change. Is it going to be with us forever? Will there be more natural disasters? There is a huge push for green finance. Regulators are pushing companies to improve their environmental, social and governance (ESG) compliance, which has affected everybody.
What does this really mean for Malaysia?
Sheng: Every crisis equals opportunity. The role of Bursa Malaysia to raise funds post Covid-19 for companies to restructure, is imperative. Companies need new capital to cut down debt.
This zero interest rate era is all about Islamic financial markets, which is a great opportunity for Malaysia because Islamic finance markets are ethics-based and all about risk sharing. From the earlier phase of Islamic banking, the time for Islamic stock markets is coming. This is where a lot of creativity is needed.
Another great opportunity for stock markets is to help SMEs (small and medium enterprises) and micro SMEs (MSMEs). There are only 41,000 listed companies worldwide but there are 400 million SMEs that do not have access to capital markets.
Also, there is ASEAN. By 2030, ASEAN will be the fourth largest economy in the world, larger than Germany and Japan together. This puts Malaysia in a sweet spot.
We must realise there is no guide â we have to experiment, to take risks, to push forward. I am very excited about the new capital market masterplan produced by the SC. It will really set the tone for the years to come.
What will regulators have to watch out for to manage these developments, considering the exponential development of technology?
Sheng: Members of IOSCO (International Organization of Securities Commissions) are guided by the IOSCO principles to reduce systemic risk, protect investors, and ensure that markets are fair, efficient and transparent. Each market has its own special characteristics and each country will push these principles according to local conditions. The biggest issue at the moment is on corporate or accounting disclosures on ESG. There is no single international financial reporting standard on ESG disclosure.
The IFRS (International Financial Reporting Standards) Foundation has just established an International Sustainability Standards Board (ISSB) to create a new global set of investor-oriented sustainability-related disclosure standards. This is still a work in progress. Meanwhile, companies are trying to figure out the best way to operate with increasing demand on transparency, while dealing with transformation.
For regulators, the biggest problem is that there are bubbly tech valuations and many scams that are going on, for example, the SEC (US Securities and Exchange Commission) is trying to deal with all the cyber currencies issues, and how to enforce market discipline. Enforcement is critical but because tech is so new, so complex, there is now a need to understand the technology. The third Capital Market Masterplan (CMP3) has a very good section on RegTech (regulatory technology) and all these other issues, including consumer education.
What should the Malaysian capital market do to avoid losing out on technological innovation?
Datin Ami Moris: Today, capital market participants are dealing with two core technologies that really offer opportunities to evolve our marketplace â the cloud and the blockchain.
The blockchain has the potential to fundamentally shift the centre of power from a centralised to a decentralised structure. However, it remains to be seen if the majority of the market will shift to transacting via a decentralised blockchain infrastructure. What is more likely is that it will become a prevalent underlying technology and integrated as part of our centralised ecosystem.
The cloud will be the disruptive technology of our generation. It has powered the growth of investment firms across the value chain from trade tech, bank tech, regtech, insurtech to AI (artificial intelligence), enabling growth at unprecedented rates with near-zero costs, relative to just a decade ago.
AWS (Amazon Web Services) estimates that moving to the cloud saves over 50% of total infrastructure costs and provides a 75% faster go-to-market execution. Malaysia could lose out competitively if we see it as a question of adoption versus adaptation. We need to clearly adapt.
We need to be nimble to capitalise on todayâs opportunities.
Can you share with us the key elements in the CMP3 that the SC sees will position the Malaysian capital market in the next stage of growth?
Datuk Syed Zaid Albar: As we recover from the pandemic, it is extremely important to build back better.
Malaysia needs to enable our businesses to recover, and nurture new economic frontiers. The fundraising ecosystem will therefore have to help these companies with various risk profiles to gain access to capital. We have seen the emergence of our first unicorn, Carsome. We should nurture more of such companies and provide ways for them to raise capital to eventually seek listing on Bursa Malaysia.
The CMP3 envisions a capital market that is relevant, efficient and diversified. We must be relevant to MSMEs and mid-tier companies too as they comprise more than 60% of our GDP. For them to compete regionally and globally, we need to broaden alternative finance and innovate, to be relevant for them. This will enable Malaysia to transition to a more sustainable economy.
The market also needs to be efficient in the face of rapid innovation. We need to see healthier competition in our market, which brings greater value to our issuers and investors. We need to generate greater efficiency to achieve desired regulatory outcomes.
Lastly, we need a more diverse market that caters to all types of investors, from the millennials to the baby boomers, to facilitate inclusiveness and promote vibrancy. This will empower all Malaysians to invest for their future, especially as the rapidly ageing population places more pressure on pension systems.
Catalysing competitive growth of businesses and markets
You are constantly engaged with businesses of various sizes and across sectors about funding needs to grow and compete not just locally but also globally. Is the traditional source of funding through the public market still the main driver or are they increasingly looking at financing through the private market? Is there a need to have more capital market instruments to channel the pool of money to businesses?
Ami: Malaysia is a mature capital market, where most big corporations are still not listed for strategic reasons. The traditional sources of capital, that is, borrowings in the form of sukuk, bonds, bank loans and equity by listings and placements, are still the primary sources of funding. We also have the LEAP and ACE Markets that offer fundraising platforms for smaller companies.
However, where we are seeing a lot of activity is in private equity (PE), venture capital (VC) and even equity crowdfunding (ECF). These have become an increasingly important source of growth capital as corporates look to align capital structure with their business models. Examples are Sunway partnering with GIC Pte Ltd for healthcare investments totalling up to RM750 million; Creador, the PE behind two of our biggest and most recent IPOs, Mr DIY and CTOS, raising over RM2.5 billion; and over RM600 million raised on P2P and ECF platforms.
Malaysia does have the relevant fundraising platforms across the ecosystem for MSMEs to large caps. However, the question perhaps is whether there is efficiency in the mobilisation of capital for SMEs at the entrepreneurial level.
With low technology cost, relatively low cost of capital and a flush capital market, we need to help Malaysian entrepreneurs create and build globally respected businesses. We also need a diverse range of entrepreneurs. Tech entrepreneurs are great, we love them. But we need others to tap the RM600 billion we estimate is required for ASEANâs economic and social infrastructure over the next 10 years.
Institutional funds have largely invested in the public market. Do you see GLICs (government-linked investment companies) putting more money in the private markets? Or does the risk-return profile mean that private markets will always be a small part of your portfolio?
Nik Amlizan Mohamed: I believe, from the risk-rewards perspective, private markets have come of age.
Our exposure to the private markets is represented by three different asset classes: PE, infrastructure and property. It has grown from less than RM1 billion in 2008 to almost RM9 billion in 2018. This exponential growth and exposure to the private market is not unique to Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and this strong growth is expected to continue over the next 10 years.
A well-diversified portfolio provides long-term risk-adjusted returns, as well as a higher level of protection against short-term volatility in public markets. Due to their illiquidity, we approach assets in the private market from the long-term portfolio construction and value investing perspectives. So for this reason, asset allocation to private investments tends to be on a more gradual basis to proven profile and portfolio decisions to take place.
As a pension fund, the mandate for private markets is also held at a higher standard. Naturally, we gravitate towards markets that are more mature, and we impose stricter due diligence. For example, our board members of unlisted companies are more specialised.
I must commend the SC for promoting angel investors, incubators, ECF platforms, and the VC and PE space. There is also a need to develop the support infrastructure and local expertise.
As start-up VCs and PEs and their regulatory environment mature over the next few years, familiarity and availability of data will facilitate and help both asset owners and retail investors become more at ease with these private markets.
Ahmad Zulqarnain Onn: Yes, we are into private markets like many asset owners and large institutional investors. The return experience has been very positive over the past few years. Weâre clocking in double-digit returns in PE. Weâre seeing very steady income coming through from real estate, Covid-19 notwithstanding. With a diversified portfolio, even though certain sectors have been hit, other sectors such as logistics and data centres have helped to offset weaknesses elsewhere.
It is also instructive to look at it from the other point of view as the trend towards private capital funding for businesses is going to continue to grow. The fundraising timeframe is faster and it is something we should be anticipating.
The traditional model of âas you get large, you are going to go publicâ may not be valid anymore, because capital is becoming more patient. The issue of illiquidity is also being tested. We are beginning to see quite a number of secondary transactions in the private markets where essentially, there is a marketplace being created, over the counter, to transact these assets between capital owners.
Another advantage of private markets is that the financial capital comes with intellectual capital. Choosing the right investor is important for founders and entrepreneurs today, because itâs not just about money but also the relationships, networks, know how, etc.
As a shareholder, you are also being tested on the value that you bring to the table, which is not something that you would have in the public markets. This is a space that we should continue to encourage and facilitate from a regulatory standpoint.
ASEAN as an economic bloc is home to 800 million people and millions of fast-growing businesses. Can you offer a perspective of where Malaysia stands in the context of ASEAN as a capital market relative to our neighbours? Have we made full use of our first-mover advantage in the Islamic capital market (ICM) or is there a lot more that needs to be done given the competition?
Datuk Mohammad Faiz Azmi: ASEAN is a very large market of independent countries, different cultures, languages and levels of development. Malaysiaâs diverse capital market and deep bond market have served us well but investors also want to benefit and diversify their risks. We need to provide more options for Malaysian investors to have investments in the region. Why should global investors be the only ones to join the growth in ASEAN?
We also need to explore bringing regional investors into our market. We should try harder to attract our neighbours to list their companies and participate here. Perhaps we could do it sectorally.
On ICM, I think we have done very well. From an ASEAN perspective, our innovative and transparent way of dealing with new Islamic products has made the adoption of ICM products in other countries like Indonesia and Singapore a lot easier. While the pace has slowed down, I still feel we have a first-mover advantage.
It is an area of competitive advantage for Malaysia as scholars look beyond Shariah compliance to the goals of Shariah, which explains the convergence of Shariah with ESG. We should develop this further to reward companies that do well in ESG and attract Islamic-based funds to Malaysia.
Another area we should look at is using socioeconomic principles in some ICM products. Given the current decimation of MSME businesses and pressures on government finance, the Islamic capital market can play a bigger role in mobilising capital for public good. We should look at waqf as a way of tapping the public who want to have a reasonable return while contributing to social good. Or consider crowdfunding for Shariah companies to help recapitalise MSMEs.
What is the SCâs view on this? Are we moving fast enough in the Islamic capital market?
Syed Zaid: The leverage we gained as the first mover has enabled us to chart a new path. I will talk about four of these new priorities.
First, digital Islamic capital markets. Although still in its infancy, we have already seen the ground-breaking resolution by the SCâs Shariah Advisory Council allowing investment and trade in digital assets. We recently launched FIKRA â an Islamic FinTech Accelerator Programme that aims to attract start-up applicants with innovative ideas or solutions in the areas of Halal, Sustainable and Responsible Investment (SRI) and Islamic Social Finance. And there are already Shariah-compliant options offered on FinTech platforms such as digital investment management, P2P and ECF.
Second, on sustainability. We have brought both ESG and shariah values together to develop offerings that fulfil both sustainability and shariah criteria. Following the offering of the social impact sukuk as the inaugural issuance under our SRI framework, we have also pioneered the green sukuk, paving the way for more markets globally to follow suit.
In addition to facilitating the worldâs first waqf IPO and including waqf-based projects as eligible projects under the SRI Sukuk framework, we recently launched the waqf-featured fund framework. We will also seek to facilitate issuances of a wider range of sukuk and other Shariah-compliant instruments to fund social-impact projects.
Third, Islamic market-based financing to cater to Malaysiaâs MSME halal-centric economy. We recently launched a shariah screening assessment toolkit to guide unlisted MSMEs in shariah-compliant fundraising. Thus, MSMEs in the halal sector can raise shariah-compliant funds from the capital market, and create a broader range of alternative Islamic assets for investors.
Lastly, given the size and diversity of Malaysiaâs ICM, we are placing greater importance on shariah governance. We are currently enhancing the shariah governance framework, to focus on strengthening the capacity of our ICM practitioners.
Ahmad Zulqarnain: Over the next month or so, we will launch a waqf service for our unit holders to waqf their ASNB investments in an easy manner. This is something a lot of them want. We are working with Majlis Agama Islam Wilayah Persekutuan (MAIWP) and a committee will be set up between PNB and MAIWP to govern the waqf fund.
Malaysia has an ageing population and a growing middle-income segment. A prolonged pandemic could impact their savings. What are the investment expectations and challenges that you anticipate? And is the local capital market providing you the room, growth and support to generate the returns that you need?
Nik Amlizan: In the last 10 years, our domestic market benchmark gave an annual return of 1.6% per annum versus an MSCI All-Country World Equity Index return of 12.8% per annum. The vast difference in performance provides the first challenge.
How do we grow the fund size as fast as possible within the risk limits given to us to support the government and the ageing population? And at the same time, provide capital to the domestic market?
We have to identify companies with above market returns, and we need a lot more in-depth analysis to better understand the companies and the sectors they are in.
This is also why I am very excited about the private markets, where returns are still double digit.
Another challenge is the low interest rate, given the ageing population and slower working age population growth. It could potentially drive down interest rates and returns from investment.
Emerging opportunities will most likely involve investments in aged-care products, health and services such as healthcare and wellness, nursing service providers, senior living facilities and retirement villages.
We are excited about these new and upcoming opportunities, which we foresee will take place over the next 10 years or so.
Ahmad Zulqarnain: I will make three points on how demographic change will affect PNB.
One is on channels and how people interact with us. We are the asset manager for over 12 million Malaysians or about two in every five Malaysians. Over the next 12 to 18 months, more people will transact with us digitally versus over the counter. So, our ability to service a large population digitally is going to be critical for us.
Two, as demographics change and millennials start to accumulate wealth, the demand for sustainable and socially responsible investments will increase. As an asset manager, we need to respond to that demand and offer products to the population that they desire.
The third thing is the intergenerational transfer of wealth. From baby boomers to Gen X and millennials, the tipping point is fast approaching. As an asset manager, we need to be prepared â how do we deal with this generational transfer of wealth to make sure it remains invested in the best way possible?
Creating a more stakeholder-oriented economy
Not a day passes by without us hearing about climate change and sustainability in global finance and investments. The big money institutional investors are moving fast to invest only in ESG-conforming businesses. Banks are also heading in that direction. How should capital markets play their role in pursuing the same agenda? Should they reject non-environmental friendly businesses, for instance? Or is there a more subtle approach that can be taken?
Sheng: Is ESG a compliance issue or a profit opportunity? If you donât make profits, you lose value for everybody. I want to turn ESG into SEG. Itâs about strategy, execution and governance. I want to quote Harvard strategy guru, Michael Porter who said, âStrategy is about how to create unique value, not ME TOO!â What he really means is, if you comply only with the average, people are not interested. They want to see extra value.
In 2001, when I was in IOSCO, Harvard regulatory professor Malcolm Sparrow said, âPick important problems, fix them and tell everyoneâ. Now, what are the important problems? The real issue is âwhat is wrong with your strategy and why canât you execute and deliver unique value?â You need to understand the foreign markets. For example, the US market is completely distorted because of the FAANG (Facebook, Amazon, Apple, Netflix, and Alphabet) stocks.
How can we compete? We donât have the speed, scale and scope to compete with the Facebooks and Netflixes of the world. So we really have to rethink our unique strategy.
So really, for Malaysia to deliver unique value, our companies have to face volatility. This is why it is either a black swan, which is very bad, or a unicorn. That is why Islamic finance is about unicorns. We need to nurture unicorns that are Shariah-compliant. We cannot deliver unique value without taking risks.
How do you think corporates in Malaysia are adapting to the sustainability agenda and what more can they do?
Mohammad Faiz: If Iâm honest, many corporates here in Malaysia see it as something relating to CSR (corporate social responsibility), and it certainly doesnât feature in many boardroom agendas. However, in the last year or so, there have been some nasty shocks. Some companies have had their goods seized at ports. Our major export, palm oil, is under constant scrutiny for deforestation and labour practices. And I hear that even other industries are being looked at for their labour practices. As if that is not enough, the US government has now classified us as a tier-3 country in their 2021 Trafficking in Persons report, where we join countries such as North Korea, Cuba and South Sudan.
There is clearly no avoiding the issue, so what can they do?
First, declare a Net Zero Emissions Target. It forces companies to look at the way they do business and their corporate strategy, to quantify risks and to incorporate mitigation plans.
Second, have a look at the SCâs MCCG (Malaysian Code on Corporate Governance) 2021 requirements. As the guidance says, disclosure should set out targets, explain why they are not meeting them and tie these targets into their remuneration framework. To quote, âdisclosures should be more in substance than formâ.
And finally, companies should recognise the impact it has on their reputations and the degree of trust with their stakeholders. It is important for boards to understand that their stakeholders are not just shareholders but the wider community, which expects companies to consider people and planet while making profits.
Boards should take this very seriously and it should be part of the board agenda.
What about institutional investors â how can they play a role in the ESG agenda?
Nik Amlizan: We know that globally, ESG assets have grown to US$35 trillion from US$30 trillion about three years ago and it is expected to grow.
Discussions on the environment are on centre stage. At COP26 (2021 United Nations Climate Change Conference), more countries will set their real quantifiable goals. Industries and corporations will have to move towards those goals. As benefits of these actions become more evident, not only from attractive capital but also from real business demand, it will get more people to be onboard.
Closer to home, not too long ago, individual companies could not really calculate GHG (greenhouse gas) emissions, but now they can. We will be able to know the actual total emissions of our listed portfolio. With this data, we can work to reduce those numbers.
I also expect climate and social issues to be incorporated into voting guidelines. There will be more impact investing as the benefits on the financial side and to society as a whole becomes more evident.
I also wish to see more collective effort and stewardship among institutional investors. With our relatively large shareholding and long-term investment horizon, we are in a good position to bring about changes and to offer a variety of options and vetoes for investors, particularly retail investors.
But I do acknowledge that change that is sustainable will take time. It requires an ESG-conscious culture that permeates corporations and society at large.
Ahmad Zulqarnain: As more and more investors adopt ESG considerations, we will see the cost of capital for companies that are deemed not to be ESG-compliant going up. As equity investors sell down, share prices go down, cost of equity goes up. As banks also start embedding ESG into their lending considerations, the cost of debt is also going to go up.
Even more worrying from a company standpoint, other than the cost of capital going up, is the potential loss of revenue. If a company is not ESG-compliant, there is the risk that you cannot sell to certain geographies, or to certain customers. This potential loss of revenue is an existential problem.
So I want to echo the call to action to take ESG very seriously. Boards must make this a regular part of the agenda and start thinking about transitioning to a place where these risks are mitigated and eliminated.
So what role do regulators like the SC play in pushing this agenda?
Syed Zaid: There are various aspects where a regulator can shape the sustainability agenda in the capital market. I will highlight three of them.
First, building trust in responsible businesses. We see CG playing a key role in shaping businesses that are responsible to the broader stakeholders â people, planet and prosperity. For fund managers, we are facilitating the issuance of sustainable investing standards on ESG governance and disclosures.
Second, enabling SRI funding options and investment products. The SC has over the years enabled various standards and frameworks across bonds, sukuk as well as fund management. This will continue to be refined and enhanced to enable the evolving needs of our market participants.
Third, enabling transparency on ESG risks, and measuring progress in managing such risks. In this case, disclosures and data will be game changers. For this, a roadmap towards mandatory sustainable disclosures for companies and financial institutions will be fundamental.
Data will also be crucial enablers for investors to benchmark the performance of ESG investments, to assess and measure ESG risk and to track progress against ESG commitment.
Finally, the broader ecosystem will need to enable the growth of SRI holistically. This ranges from the ESG data service providers to the credit rating agencies and auditors.
Leadership plays a critical role in preventing lapses in public listed companies. Is there more that can be done beyond mere regulations?
Mohammad Faiz: One measure of success in leadership is the absence of corporate failures.
Regulations have a place but I think we already have a lot. To me, there are behavioural aspects that we need to focus on. For example, the importance of the chairmanâs role in managing boards, how they encourage diverse views and are able to make decisions in line with their purpose.
We talk about diversity more in terms of gender, but what about experience, ethnicity and backgrounds to ensure that the board has many views when making decisions? I believe that boards need to try harder to be bolder. Collectively, boards tend to be very risk-averse but history has shown us that businesses that are slow to adapt or change get disrupted and eventually fail.
Has the level of corporate governance (CG) improved or deteriorated in recent years? What else can be done?
Syed Zaid: There has been a marked improvement in CG over the years. You can see the evidence of this in terms of the number of independent directors appointed to boards, which are over and above the minimum requirements. Also, the two-tier voting process has been adopted by many companies.
But there is always room for improvement in some areas, for example, gender diversity. There are still over 200 companies that have all-male boards. Other than gender diversity, boards should also focus on other aspects of diversity as well, such as experience, age, ethnicity and cultural background.
We also want to see improvement in board refreshment. Boards need to evaluate their composition to ensure it is optimal, and that their skill sets and experience are relevant to the long-term goals of the company.
Another important area is investor activism. Investors, especially institutional investors, need to hold boards and senior management accountable for their actions. We want to see more active and effective engagement by both institutional and retail investors, to ensure that material ESG risks are being addressed by the companyâs leadership.
Lastly, beyond regulations, companies need to fully internalise a good corporate governance culture. It is not enough to adopt the MCCG practices. They need to walk the talk.