Countries that are in the news for all the wrong reasons – like an epic corruption scandal – might not seem the most likely to have steady, stable stock markets.
But the stock market that boasts the world’s longest bull market is scandal-plagued, China-and-oil export dependent Malaysia. Of any stock market, the KLCI (Kuala Lumpur Composite Index) has gone the longest without a 20 percent correction (which would represent a bear market, and the end of its bull market).
Since December 2008, Malaysian shares more than doubled (up 88 percent in U.S. dollar terms). It hasn’t been a very smooth ride – at one point last year the KLCI was down 18 percent. This year it’s up about 1 percent.
Malaysia’s closest global rival, in terms of length of bull market, is the U.S. S&P 500. It has been in an official bull market since March 2009 – four months less than Malaysia. (The S&P 500 was down as much as 10 percent earlier in 2016, but has since recovered and is also now up 1 percent for the year).
One reason, as we’ve written before, that Malaysian shares haven’t suffered a sharp fall in a long time is that it’s a defensive market. That means the exchange has a lot of companies that are less sensitive to the economic cycle. These include health care, telecoms, utilities, and consumer staples (like food) companies. People go to the hospital, smoke cigarettes, watch cat videos on their phones and turn on the lights regardless of how the economy is doing.
That also means that Malaysia’s market is a lot less volatile than a lot of other markets.
It’s also helped that Malaysia’s stock market is relatively cheap, at least in global terms. The price-to-book ratio (P/B) is one way to measure how “expensive” a stock or market is. It takes the share price and divides it by the net assets of the company. For an entire stock market, the average P/B for each stock on the exchange is used. The lower the number, the cheaper the market.
Malaysian shares currently have a P/B of 1.8. The rest of the world, measured using the MSCI World Index, is at 2.1. Although it was relatively expensive during much of its recent strong run, by this measure, Malaysia is about 15 percent cheaper than most of the rest of the world. But compared to the rest of Asia, it is still expensive. The MSCI Asia ex Japan index has a P/B of 1.4.
In recent months, foreigners have been pouring money into Malaysian shares. As of the end of March, over US$1.1 billion of foreign money had been invested in Malaysia’s stock market so far this year. That’s more than South Korea and the other Southeast Asian countries have received.
And it’s a reversal of what happened last year, when money left Malaysia at a pace not seen since the global financial crisis of 2008. One analyst estimated that about US$5 billion worth of foreign funds were taken out of Malaysian stocks in 2015.
The surprising thing about Malaysia’s performance is that it’s happening in the midst of a major scandal. Malaysian Prime Minister Najib Razak had US$681 million dollars appear in his bank account a few years ago, and has been under investigation since.
Plus, state investment company 1Malaysia Development Bhd. is being investigated in Malaysia and other countries for money laundering and other suspicious practices. Najib is the chairperson of 1Malaysia Development.
In addition to the defensive nature of the market, relatively low valuations and foreign money, the Malaysian market’s strong run has been boosted by domestic buying. The Employees Provident Fund (EPF), Malaysia’s state pension fund, manages over US$170 billion in assets and is a major shareholder of many Malaysian public companies. Its assets under management have been growing at a compounded annual rate of almost 10 percent since 2008 – and the EPF has invested a lot of this new money into the stock market.
Malaysia’s institutional funds, including the EPF, accounted for almost half of the total market value of traded shares, compared with 29 percent for foreign funds, according to data compiled by the Malaysian stock exchange. They’ll continue to be an ongoing buyer, which will support the market.
No market goes up forever, and sooner or later markets (and everything else) revert to the mean. Malaysia’s run of strong returns could end years from now – but the odds are that it will be sooner rather than later.
However, if you think there’s still a long way to go for Malaysia’s stock market, you can invest through the iShares MSCI Malaysia ETF (New York; ticker: EWM), or the XIE Shares Malaysia ETF that trades on the Hong Kong exchange (code: 3029). The XIE ETF is a synthetic ETF, which means it owns an investment product called swaps (these mimic the performance of the KLCI).