Malaysian asset managers remain upbeat, despite credit rating cut
06 August 2013
News, Asia, Malaysia, Emerging Markets, Southeast Asia
By Toby Garrod
Fund managers in Malaysia are shrugging off concerns regarding the recent rating cut from Fitch from ‘stable’ to ‘negative’, pinning their hopes instead on the continued advancement and internationalisation of the markets there.
Local managers expect a deepening of the product range thanks to the expansion of the cash management market, the rising number of mandates being outsourced to international players, and the continued global expansion of the country’s extensive Shariah finance industry.
“Malaysian government-linked companies are actively outsourcing their asset management or treasury functions to domestic asset managers, in particular investment in cash management funds,” says Abdul Razak Ahmad, chief executive officer of Kenanga Investors Berhad. “The cash management funds have become very successful tools for many corporations after the government provided tax exemptions for the interest income received by trust funds. With this cash management, the industry has developed to become more holistic in approach, and not limited to just equity and fixed income segments.”
A rise in overseas investments has also prompted optimism regarding market development..
Due to limited assets and compressed yields for asset classes domestically, the Employee Provident Fund (EPF) recently announced that it expects to invest up to 23% of its investment assets in the international markets, intensifying its investments in global equity and fixed income.
“The focus on overseas is to complement the EPF’s long-term investment plan and to provide a reasonable rate of return on the savings of its members," says Mr. Razak. "Last year, an additional US$5.54 billion worth of investments in overseas investment mandates was made and cumulatively, the total capital drawdown in non-ringgit investments as at year-end 2011 was approximately $17 billion.”
Meanwhile, one of the projects under the government’s Economic Transformation Programme targets asset management industry AUM of 1.6 trillion ringgit (US$543 billion) by 2020, representing a compounded annual growth rate of 17%.
Fulfilling the expansion plans, Malaysian asset managers are increasingly growing their investment capabilities regionally.
“Increased internationalisation, particularly in regard to the upcoming ASEAN Economic Community, has led Malaysian asset managers to expand their investment capabilities regionally,” says Munirah Khairuddin, deputy chief executive officer of CIMB-Principal Asset Management. “To encourage the broader expansion of the asset management industry in Malaysia, government-linked investment companies’ mandates to external fund managers will be increased to 15% from 5% of AUM.”
Perhaps most significantly, the strengthening of trade and investment ties between Asia and the Middle East has recently prompted greater financial linkages to ensure broader global development of the Shariah finance industry.
“This will also serve to further reinforce the rising importance and prominence of Islamic finance,” says Mr. Razak. “In asserting itself as the global Shariah finance hub, Malaysia has collaborated with other financial centres with the objective of strengthening the international inter-linkages of the global financial system as it will offer new business opportunities and expand markets to support increased inter-regional trade and cross border investment flows.”
With rewards come risks
Such internationalization does pose challenges for the regulators and market participants, however.
“Regulators need to take into account the increasing complexity and interdependence of financial activity at both the national and international levels,” says Mr. Razak. “These changes require a shift in traditional regulatory approach, away from prescriptive rules to a more market-based approach.
“Meanwhile, technology is increasingly allowing investors to look outside their home countries. This can be seen as both a challenge and an opportunity. Domestic talents need to also be nurtured and global talents need to be enticed to come to Malaysia.”
Sentiment is further bolstered by improved economic conditions and rising business confidence, with a recent surge in infrastructure spending and the recent general election result lifting Malaysia's economy in the second quarter, the latest Global Economic Conditions Survey (GECS) has revealed.
"Malaysia is echoing that confidence boost and seeing good conditions, thus recovery is seen as substantially more robust," Association of Chartered Certified Accountants (ACCAs) Senior Economic Analyst and GECS Editor Emmanouil Schizas said in a statement.
In the second quarter, 37% of businesses (up from 32%) reported confidence gains, the survey showed.
Malaysia ACCA Head Jennifer Lopez said that as demand and cashflow pressures fell in Malaysia, businesses saw greater capacity building. She said much of the capacity growth was fuelled by government spending.
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