Malaysia to launch equity research scheme

Malaysian authorities have established a fund to pay for research on under-covered Malaysian stocks.

The Capital Markets Development Fund, part owner of Bursa Malaysia, is to launch a scheme whereby it will sponsor brokerage firms to write research on Malaysian stocks. The scheme, confirmed by Encik Yusli Mohamed Yusoff, CEO of Bursa Malaysia, is scheduled to commence next year.

"The Capital Markets Development Fund will start funding a research scheme for listed SMEs," says Yusli. "They are still working out the final details but they are targeting next year [to start the scheme]."

Under the plan, the CMDF will put aside a certain amount of money, which it will give to research houses to write the research. The idea is not to make any of the listed companies that get covered by the scheme pay any money into the pot. The research will then be provided free over the internet for local retail and institutional investors as well as foreign investors. According to Yusli, any brokerage with a license will be eligible to take part in the scheme.

The scheme is being undertaken to try to get more liquidity in the Malaysian market. At the moment only 100 or the 900 or so listed companies on the exchange have research coverage, and this is one of the reasons that liquidity on the exchange is so low, says Yusli. At the moment 10 companies account for 50% of the market cap of the exchange and the market velocity (the amount that the total market cap trades in one year) is only 30%-40%. In Korea and Taiwan, the stock exchanges have a market velocity of over 100%.

The research scheme is also being introduced at the same time as the Securities Commission is opening the local broking market to foreign banks and intermediaries, again in an attempt to get more liquidity into the system.

According to Yusli, the proposed research scheme is quite similar to the one pioneered last year by the MAS and SGX in Singapore. The slight difference with that scheme from the proposed Malaysian scheme is that in Singapore, the companies that wish to be covered contribute to the overall fund from which the research is paid. The Singapore fund has S$7.5 million at its disposal to pay for the scheme.

Last week the SGX announced that due to the success of the early part of the scheme it was launching phase two, under which the research will actually be produced. Under this scheme, each research firm will receive S$75,000 a year for covering 15 stocks. Each stock will have to receive at least four reports annually: an initial coverage report, two results reports and at least one update report. Phase two of this scheme is beginning on December 1, with 122 listed companies and nine research firms already taking part through phase one.

The timing of the Malaysian scheme is interesting, coinciding as it does with efforts to get more foreign brokerages to undertake local market work. This scheme looks like being one way to attract them back to the market. However, it must be acknowledged that the sums involved in the Singapore scheme do not actually cover the cost of producing that research. As with all other research, much of the cost must come from the increased brokerage fees that the research is intended to generate.

The Capital Markets Development Fund was created earlier this year when the KLSE was demutualized and converted into Bursa Malaysia. The fund received an allocation of 30% of the shares of Bursa Malaysia with which it funds such schemes to boost the development of the market.