The Securities Commission Malaysia (SC) launched the country’s Third Capital Market Masterplan (CMP3) yesterday, which is aimed at serving as a strategic framework for the growth of Malaysia’s capital market till 2025. Making mid-tier companies (MTCs) one of its key development focus in the coming years, the CMP 3 will be underpinned by six (6) development and regulatory thrusts:

• Development #1: Facilitate fundraising for competitive businesses through a diverse market and intermediation ecosystem
• Development #2: Empower all Malaysians to invest for their future and promote digital inclusion and protection for vulnerable investors
• Development #3: Through the Sustainable and Responsible Investment (SRI) and Islamic Capital Market (ICM) pillars, the CMP3 aims to mobilizing more capital towards sustainable businesses
• Regulatory #1: Strive to embed greater shared accountability within the capital market, particularly corporate responsibility to stakeholders beyond short-term profitability
• Regulatory #2: Achieve a more efficient regulatory outcome and greater efficiency in investor protection through swift, effective and targeted enforcement and supervision approaches
• Regulatory #3: Greater use of technology — both regulatory technology (RegTech) and supervisory technology (SupTech) — for greater efficiency and deeper insights

Key Highlights of CMP3 Thrusts

Development #1: Catalyzing competitive growth

• Enable funding to competitive businesses to push the frontiers
• Facilitate a multi-layered market to build a more competitive value proposition
• Facilitate diversity in the intermediation landscape for healthier competition
• Expand risk intermediation for more competitive growth

As part of this strategic thrust, the SC has said that it may explore establishing a framework for Angel Funds and Angel Syndication Lists for early-stage financing. Given higher risks involved in early-stage financing, credible cornerstone or lead investors that are willing to put up the initial share of capital in early-stage deals would increase the confidence of other investors to also put in funds.

The SC will also encourage participation from institutional investors, one which is seen as key in strengthening the growth-stage financing in Malaysia. It suggested co-investments as a means to help bridge the gap.

CMP3 also highlighted that the number of late-stage growth companies listed on the LEAP and ACE Markets have more than doubled in the last decade and constituted 80% to 90% of the total initial public offerings (IPOs). It added that there is a potential for a much larger pipeline of late-stage growth companies that may seek to tap into the public market as the private market grows. To facilitate this, the SC will enable greater listing efficiency moving forward, starting with companies listing on the ACE Market seeing a more streamlined regulatory framework

Development #2: Empowering investors for a better future

• Empower with more options to diversify, for wealth accumulation, preservation and de-cumulation
• Empower with higher quality and more accessible advisory, to complement varying levels of investment literacy
• Empower with efficiency, from ease of information to efficient processes, to augment the investor experience
• Empower for digitization, to bring more investors along the digital journey

The SC is looking at several developments that will better empower Malaysian investors to invest for their future. In the retirement savings space, the SC believes that investors nearing retirement may benefit from the introduction of the portfolio account management schemes (PAMs) within the Private Retirement Scheme (PRS). PAMs will also be liberalized for a broader set of PRS providers in Malaysia that extends beyond the current unit trust companies. In some markets, pension asset managers and retirement schemes are increasingly collaborating with fintech players and robo advisers to offer convenient, accessible and affordable solutions.

The SC has also said that it will look into increasing the offering of investment funds to enable greater access to foreign funds and strategies, while ensuring a level playing field for domestic and foreign fund managers. To this end, the unit trust industry will see phased liberalizations, starting with a framework to allow the offering of foreign funds that are from within the group of companies of domestically licensed fund management entities to high-net-worth entities, such as institutional investors and listed companies. In the mid to long term, this offering could be extended to high-net-worth individuals and even retail investors.

Development #3: Shaping a stakeholder economy with SRI and ICM

• Enable greater capital mobilization to businesses that create value for stakeholders of the economy
• Expand the reach of ICM to the broader stakeholders of the economy
• Collaborate and innovate with broader stakeholder groups for a more sustainable growth

To further this strategic thrust, the SC will explore approaches for transition financing in Malaysia while also facilitating wider options across the funding escalator for companies embarking on net-zero commitments.

In embracing collaboration and innovation for growth, Malaysia will be positioned as a hub for SRI by developing thought leadership, catering to regional capacity-building needs as well as championing innovation and research. The SC will also enhance ICM global thought leadership to promote greater alignment of capital market activities with maqasid al-Shariah, while building capacity for ICM by strengthening the capabilities of practitioners in the area of Shariah governance and by developing talents for Islamic wealth management.

Regulatory #1: Embedding shared accountability in the capital market

• Promote businesses that are accountable to the environment and the broader stakeholders of the economy
• Inculcate greater industry accountability to mitigate misconduct through self regulation
• Encourage third parties to hold market participants accountable for their actions, in particular in ESG practices
• Enable shared accountability in the capital market with principles-based regulations and greater regulatory transparency

Amongst initiatives to be undertaken will be the strengthening of board leadership through effective board composition, development of capacity for ESG leadership in corporates, formulation of strategies, including guidance, to incentivise greater voluntary self-reporting or co-operation, accelerating shareholder activism and stewardship, focusing on greater use of digital tools and platforms and the calibration of supervision and enforcement approaches in tandem with principles-based regulations.

Regulatory #2: Prioritizing efficiency and outcomes

• Prioritise efforts in protecting investors against vulnerabilities
• Prioritise fit-for-purpose regulatory architecture for enhanced regulatory outcomes self-regulation
• Prioritise supervisory efficiency with technology as well as effectiveness in coverage and conduct
• Enhance enforcement approach to prioritise swift, effective and targeted outcomes

To further this, the SC will, amongst others, elevate supervisory and enforcement focus on misconduct relating to vulnerable investors, particularly senior investors, review licensing and registration framework in tandem with the review of regulatory architecture, expand supervisory coverage across the industry as well as strengthen capabilities on emerging risks arising from SRI and innovation, enhance the efficiency of enforcement triage and investigation, including through the exploration of new enforcement tools and use of advanced analytics as well as institutionalize annual identification of the SC and AOB’s (Accounting Oversight Board) enforcement priorities, in alignment with the broader priorities of the SC.

Regulatory #3: Embracing the digital age

• Encourage the embrace of RegTech for effective compliance, risk management and regulatory reporting
• Navigate emerging data, AI and other technology risks as the capital market embraces digitization
• Embrace greater use of data and technology in the SC for better regulatory efficiency and effectiveness

The SC will deepen understanding about RegTech within the industry through outreach programmes and industry-wide dialogues, encourage the industry to adopt RegTech through education, engagements and joint implementation of pilot projects, strengthen analytics and predictive capabilities to augment policymaking and risk surveillance, and enhance automation of process workflows to elevate efficiency across regulatory activities.

THOUGHTS. With CMP3 very much a framework and work-in-progress for the coming five years, the strategic initiatives laid out – greater adoption of technology as the digital age takes deeper root in our daily lives, prioritization of sustainability in business practices, constant protection of investors interests (particularly the vulnerable, and the enhancement of funding landscape for the various stages of growth – will continue to strengthen the Malaysian capital market further which has expanded to RM3.4 trillion at the end of 2020 from RM2 trillion at the start of 2011.

In the present however, the Malaysian capital market (equities in particular) will continue to be dominated by political and COVID-19 related developments. While there appears to be some measure of peace on the political front (for now) and some manner of improvement in the domestic pandemic situation with number of new cases declining on a daily basis, albeit still high, the market has not kicked-off from the 120- point gain seen in early-August. In fact, the benchmark FBM KLCI has surrendered 70 of that 120-point gain to now hover at the 1,530pt mark.

The market will continue to be very much a trading-oriented one for now, though it is encouraging to note that foreign investors have been net buyers in recent weeks, suggesting regional investor flow potentially picking up in momentum as the country’s growth prospects continue to strengthen.

From a medium- to longer-term perspective, the market still appears attractive, currently trading at around 1-standard deviation below the price-earnings averages. We continue to be advocates of buying on weakness, in anticipation of a rebound in 4Q 2021. We maintain our FBM KLCI year-end 2021 closing at 1,590 points.

Our stock suggestions are a mix of cyclical names to capture upsides from eventual economic re-opening and business normalcy, and stocks likely to see multi-year growth stories – D&O Green Tech., EcoWorld Development, Greatech Technology, Hibiscus Petroleum, Kawan Food, Malayan Banking, SKP Resources and Uzma.

Source: PublicInvest Research - 22 Sept 2021