A case for Malaysia to increase its competitiveness

I mentioned last week about how Malaysia’s share of pie is very small in the MSCI Emerging Market Index (“MSCI EM”), about 2.4%. You can read it here.

It is important for an emerging country to be included and grow it’s pie over time in the MSCI EM Index because it is one of the most followed global EM index. For investors who subscribed to the index (with a cost) will have only the companies listed on the index in their universe and will select only the companies in the universe to invest in based on their investment strategy and criteria (value, momentum, high-yielding etc). If your country is not the index, the companies listed in your local stock market will most likely not be included as part of investors’ selection process. And that’s a risk to your country, as you would want inflow from foreign investors.

I came across an article, written recently by an investor from Schroders. He did an analysis on how index country weights changed over the past 20 years. See the chart below.

source: www.cityam.com

Take a look at Malaysia. The pie has shrunk from over 4% in 1998 to 2.4% in Sep 2018. What is interesting is the fact that it hasn’t really moved over the last 10 years, i.e. from 2008 to 2018. But look at our neighbour, Indonesia, it is the opposite, and it is catching up with us. Even Thailand which suffered the most from 1997 financial crisis, and the fact that its weight was half of Malaysia’s weight in 2008, managed to come close to Malaysia’s current weight (that’s a significant improvement).

Don’t bother looking at China because China is an outlier, the country is big, it moves the global markets, it is very fast in adapting AI into all industries and more importantly it’s becoming more friendly to foreign investors, hence the inclusion of China A-shares ( into MSCI EM index last year (note: the main criteria for a country to be considered for inclusion in MSCI index is economic development, size and liquidity requirements and market accessibility criteria). 6 Chinese companies dominate the top 10 constituents of MSCI EM index (source: MSCI).

According to Ambank Group Research head and chief economist Anthony Dass, the impact of China’s A-shares inclusion in MSCI EM Index is minimal to other countries including Malaysia now, as it was just a partial inclusion of 5%. After the rebalancing exercise, Malaysia’s weight reduced marginally from 2.47% to 2.41%. But, he cautioned that in the coming years, as China stocks grow, the weighting of Malaysia (as well other EM countries in the index) “may be repeatedly tweaked down in favor of ChinaOver the longer term, the full inclusion of A-shares would bring the weight of Chinese stocks in the index from about one-fourth to more than one-third”. In fact, MSCI is already planning to increase the inclusion factor from 5% to 20% between May and November this year. You can read the press release here.

Hence the point of my title of today’s post, Malaysia needs to work harder to increase its relevance and competitiveness. We don’t want to reach to a point where MSCI considers removing Malaysia from the index as it has happened to Sri Lanka before.


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