Najib's RM20billion ValueCap Initiative Going to Save Malaysia Market?

Najib's RM20billion ValueCap Initiative Going to Save Malaysia Market?

14 September 2015 - The Prime Minister cum Finance Minister of Malaysia Dato Seri Najib Tun Razak has announced that the country is going to revive the ValueCap; a dormant equity investment firm set up in 2002 to invest in undervalued equities. RM20 billion will be parked under the firm as an initiative to support the recently battered KLSE market.

The news came out in early afternoon today. The Index was seen climbing with strong momentum in the afternoon session and closed up 36.03pts. Many people must be asking whether the fund is really going to save the Malaysia market. Lets not mention whether the RM20billion is going to save the market, but the confidence effect of the announcement is already been seen in the number of movement of the KLSE index itself. Therefore, no doubt the KLSE index will see an uptrend in near term.

- Until last week (11/9/15), the local capital market has experienced a net selling of RM17 billion; whereas the whole year figure in 2014 was net selling of RM7.8 billion. Technically, if combine both figures it worked out to be RM25billion roughly.

- The recovery uptrend can be sustainable, if the foreign selling pressure stops. The fundamental reason of the selling of the Malaysian stocks by the foreign funds is because of the deteriorating economic outlook at the emerging market, especially the Asia region where most raw materials and commodities are produced. The uncertainties in the US policy and also slowing down of 2 biggest economies in Asia (China and Japan) is worrying the oversea investor.

- The large scale selling was a systemic operation of the funds and institution oversea to cut down exposure in the emerging market. Other than concerning with the depreciating ringgit and dropping equity valuation, they are more worried whether the companies they invested in Malaysia is going to continue to deliver better result than many other investment options all around the world.

- We must remember that these are funds managing hundreds and thousands of millions worth of aset and they are responsible to ensure their asset value grow year by year, And when they invest in a stock, they do not invest just one or two hundred thousand ringgit. They must have done a very thorough studies and accumulated over a long periods to their holding positions today.

- These funds would not simply sell so massively just because the market is technically dropping and fundamental still intact. Because for a mammoth fund holding, for them to sell even a single digit percentage of their holding in a company is sufficient to cause the price to drop very significantly and therefore affect their overall asset valuation.

- But if they realized that the overall economy is not going to improve, and the businesses they invested here is not going to deliver better numbers in mid to long term, they may want to liquidate their funds and invest else where rather than losing the opportunity cost of holding on to a weakening business and run the risk of decreased earning multiply by decreased valuation.

- So, coming back to our main question today, is RM20billion going to solve the problem forever and save the market from dropping? No one has have a definite answer, but based on the current situation, it is unlikely to last long as the fundamental economic risks in the emerging markets has not been disarmed. China market is a good example. Even though the composition of the market participant is different with majority retail investor who are highly speculative, the several rounds of interest reduction and government and investment firms pledge to buy the stocks, the so called recovery was temporary. Once people start to cool down and realize the initiative just change the valuation but now the fundamental economy behind the businesses; even if the 20 Billion can support the selling of the foreign fund or even push up the index the foreigner will not stop selling; save and except they see a light that the economic in the emerging market is going to improve.

- This is because the ValueCap initiative is not going to improve the earning of the business they invested but rather artificially pushed up the valuation for the counters temporarily, giving the foreign funds to dispose at a better price.

- For market to recover and foreigners to feel confident towards the emerging economies again, first of all the commodities prices must be stabilized. Overall market sentiment in the commodity market has been deteriorating due to poor consumer indication in the few largest economies all over the world. Spending data and consumption has to improve to reverse the situation. Oil price will have to recover; someone will have to put an end to the crude oil war between the US and OPEC.

- Rather than spending RM 20 billion to prop up the share market, I think out government can do better in formulating new policies to further stimulate and promote local businesses. Spend to improve the infrastructure of the nation and prepare budget help to promote local goods and services overseas. Spend to retain the local talents. Spend to introduce latest techniques and technologies in the market into Malaysia. Spend to subsidize employment of oversea talents. These spending may not save Malaysia from foreign selling now, but will definitely help to transform Malaysia bit by bit from commodity based economy to knowledge and skill based economy, and so reduce the impact of commodity movement on the local economy. When the overall market recover, a better than average recovery in the economy nationwide can be observed, not only in the recovery of index but also fundamentally better corporate earnings and economic data can be expected.