Many Western investors would likely have little trouble naming this year’s biggest initial public offering in the U.S., but they probably don’t know that two of the top three global IPOs so far this year have been in an nation probably better known as a holiday destination than an investment one.
That country is Malaysia, where an interesting story has been unfolding in the IPO market. This year’s IPO calendar has included two companies which both received strong investment commitments that launched them into the top three of the world’s largest new offerings of this year.
This popularity of Malaysia’s IPO market is a testament to its domestic liquidity in my opinion, and it has kept our analysts on the ground rather busy! While foreign participation in Malaysia’s market has been modest, I think these IPOs in the midst of global market uncertainty have piqued investor interest in this often-overlooked country. The level of investor participation, whether foreign or domestic, is a function of perceived value, growth potential and expectation of returns versus other investment alternatives. If Malaysia can deliver on its promised economic reforms, I think chances are good that foreign investors could embrace equities there.
Of course, demand for new issues will vary depending on the value and attractiveness of each individual company to be listed, but given the outcomes and subscription levels of the past few deals, it would appear that demand is more than adequate. In general, new IPOs have been listed at big premium valuations in Malaysia, beyond what one might normally expect had they been listed elsewhere. While this is beneficial to the company and original shareholders, inflated levels could be a concern for the investing public, as they might not be sustainable in the long-term. Here at Templeton, we are bottom-up up investors. Ultimately it is earnings that will drive how we value a company, a conclusion we draw on a case-by-case basis.
In times of economic turbulence like we have seen in the past few months, Malaysia has stood out to many investors as an attractive investment destination. In contrast to many developed nations in the throes of debt crises, Malaysia is running current account surpluses, with reserves reaching over US$130 billion.1 While the total government (public) debt-to-GDP ratio has risen this past year to above 50% – a trend that concerns us – its total external debt-to-GDP ratio (that owed to foreign creditors) stands near 30%, reasonable in our view. (The U.S. external debt-to-GDP is more than 90%, for example.2) Malaysia’s high domestic savings rate is an asset, and we view the national balance sheet as strong overall. Like many nations this year, growth is expected to slip a bit, with the IMF forecasting GDP at 4.4% vs. 5.1% in 2011, although this rate still would outpace many economies, especially in the developed world. While not without challenges, Malaysia has generally been reaping the benefits of financial prudence in the wake of the 1998 Asian financial crisis and there is reason to believe growth could continue to rebound longer term.
To me, the potential for Malaysia’s growth appears obvious. It has a young, growing population (the median age is 26.83) and it has been a prime beneficiary of a bullish commodity cycle in recent years. Malaysia is a net exporter of oil and gas, and is one of the world’s top three producers of palm oil and rubber. The sustained rise in agricultural commodity prices has raised income levels in its rural communities, and liquidity in its banking system remains high. These elements paint a hopeful picture for strong potential consumption growth and the capacity for both public and private sector reinvestment in the Malaysian economy.
Cultural DiversityMalaysia is a beautiful country with a landscape of contrasts. Lush tropical rainforests, waterfalls, mountains and stunning beaches are juxtaposed against modern infrastructure, cities and skyscrapers. The warmth of Malaysia’s tropical sun is matched by that of its people. I like to think that Kuala Lumpur’s iconic Petronas Twin Towers symbolise the aspirations of its people to reach greater heights and a higher quality of life.
Malaysia’s tangible economic successes are widely documented, so I won’t go into too many details here. I do want to touch upon what I see as one of its key strengths—the diversity of its people. Due to its unique history among the Association of Southeast Asian Nations (ASEAN), Malaysia has an ethnically diverse, multicultural population with each community largely retaining its culture and language. This factor connects the people of Malaysia not just to the ASEAN community but also to the large emerging economies of China and India, as well as the Islamic countries of the Middle East. Malaysia’s large Muslim population has made the nation a hub for Shariah-compliant investments, which meet specific Islamic principles. In addition, being an ex-British colony, English remains fluently spoken in many parts of the country, an added advantage in global communications.
Malaysia is strategically located along a key maritime route of international trade, so in many ways, it is a natural candidate to become a hub for international commerce and finance. I think improvements in governance can further boost Malaysia’s case, such as ensuring the rule of law, fostering transparency, reducing avenues for corruption and engaging in consistent policies.
Economic Transformation Programme
Of course, the path toward reaching developed nation status can be riddled with potholes, and over-dependence on finite natural resources represents a potential one for Malaysia. However, the country has awoken to this danger and is addressing its economic bottlenecks. In September 2010, the government launched its Economic Transformation Programme (ETP), which provides a blueprint for many of the various investments and reform initiatives being undertaken in the country.
I would encourage anyone interested in investing in Malaysia to visit the government’s ETP website to see all the initiatives and progress to date. I think the ETP is ambitious and optimistic—as it should be in order to inspire greater things. (One of the goals for the ETP is for Malaysia to achieve the “high income” status of a developed-market by 2020.) To progress even further, I think Malaysia also needs simultaneous investments in education, communications and infrastructure. But even if a fraction of the ETP’s aims are delivered, Malaysia could realise greater advancement. In my view, the initial successes of the ETP could be the possible needed catalysts to drive more economic successes and potentially create a virtuous cycle.
Election Wild Card
This year’s general election in Malaysia is expected to take place before year-end, and represents a possible wild card in its future. Elections and leadership transitions create uncertainty wherever they occur, and investors are generally averse to uncertainty. What is interesting is that this particular election in Malaysia is seen as a test of approval for the current reform-minded government and could set the direction for Malaysia for the next five years. The last election in 2008 saw one of the worst showings for the ruling coalition Barisan Nasional, as it was the first time since 1969 to have not returned with a two-thirds majority in Parliament. This poor showing forced change within the system, which has so far appeared beneficial to Malaysia’s advancement.
I believe there are sparks of greater political maturity arising, and there is a gradual but noticeable discarding of previous radical politics. The spotlight has shifted instead to universal issues such as economic progress, social and economic justice, rule of law, transparency and corruption. Whichever party wins the upcoming election, the likeliest outcome as I see it is for change to continue migrating the country away from unsuccessful old practices. I am cautiously optimistic it will be for the better, as the people have declared their desire for a better life ahead. No longer seen as just a holiday destination, I believe Malaysia, and investors there, can look forward to exciting times ahead.
1. Source: Copyright © 2012 by International Monetary Fund. All Rights Reserved.
2. Source: The World Bank, 2011.
3. Source: Central Intelligence Agency CIA WorldFactbook, 2011 est.
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