This article first appeared in Capital, The Edge Malaysia Weekly on October 26, 2020 - November 1, 2020

OVER the years, the FBM KLCI — which comprises the 30 largest stocks by market capitalisation — has been dominated by the same group of companies, with the heavyweight sectors being banking, plantation and oil and gas (O&G). This begs the question of whether Malaysia’s economy has remained pretty much unchanged over the decades, having not undergone any major structural changes.

In fact, 13 companies have been constituent stocks of the benchmark index for the past 20 years. The big boys are Malayan Banking Bhd (Maybank), Public Bank Bhd, Tenaga Nasional Bhd, MISC Bhd, IOI Corp Bhd, Kuala Lumpur Kepong Bhd, RHB Bank Bhd, Genting Bhd, Sime Darby Bhd, Telekom Malaysia Bhd, CIMB Group Holdings Bhd, Hong Leong Bank Bhd and Petronas Gas Bhd.

Compared with a decade ago, 21 companies have remained constituents of the FBM KLCI. Note that there were 100 component stocks on the benchmark index before July 6, 2009, but only the top 30 were picked for comparison purposes in 2000 (see table).

The current rally and rocketing share prices of glove counters notwithstanding, Maybank is still the most valuable stock on Bursa Malaysia, with a market capitalisation of RM79.36 billion as at last Thursday.

But Top Glove Corp Bhd is nipping at its heels, given that the gap between the two companies has narrowed to RM6.44 billion in market cap. A back-of-envelope calculation shows that the glove maker will overtake Malaysia’s largest bank if its share price reaches RM9.70. Top Glove closed at RM8.90 last Thursday while Maybank ended at RM7.06.

In the upcoming FTSE review in December — the FBM KLCI is reviewed biannually — the glove sector may provide a surprise or two, given its stellar performance since the Covid-19 outbreak early this year.

In an Oct 21 note, MIDF Research says the weightage of glove counters on the FBM KLCI may more than double to 30% or 40% from about 15% currently, should Supermax Corp Bhd (market cap: RM24.4 billion) and Kossan Rubber Industries Bhd (market cap: RM18.72 billion) be included as component stocks of the benchmark index. Their addition would also double the number of glove counters on the index as Top Glove and Hartalega Holdings Bhd are already constituents.

According to Areca Capital Sdn Bhd CEO Danny Wong, the FBM KLCI comprises many similar companies because Malaysia has not developed new economic segments. “Compared with China and the US, which are more advanced in technology and ICT (information and communications technology), we still rely on conventional sectors [to the extent that even] lately, we have glove stocks dominating the market.”

Wong believes gloves will no longer be a cyclical sector with the pandemic having a devastating impact and that it should be able to maintain its dominant position as the demand for gloves will continue to be high. “The new norm will encourage people to be more health conscious. So, glove players should take this opportunity to scale and ramp up their operations. If they can take the opportunity to reinvest, they should by right be the champions of the world. We are one of the major exporters to fulfil global demand,” he says.

“There are many foreign investors for Top Glove due to its size while Hartalega is the darling of local institutions. Supermax and Kossan are more of a retail play. We hope these stocks will continue to do well and deliver good results.”

Typically, retail investors are more keen on mid- and small-cap stocks but Wong points out that over the longer term, local institutions and well-informed retail investors will also look at big-cap holdings that can deliver long-term growth.

From an economic perspective, Socio-Economic Research Centre executive director Lee Heng Guie says that being a resource-based country, Malaysia will continue to leverage its competitive advantages in driving growth. “O&G, plantation and even the rubber-based products remain the country’s biggest strengths.”

Component stocks are not the only indicator of structural changes in the economy, he points out, as Malaysia has also been diversifying to add value. “For example, the plantation industry is not just about crude palm oil but also the related downstream activities.”

But Lee agrees that the country has to start looking at non-resource-based industries such as digital economy and technology. The services industry, which contributes almost 59% to gross domestic product, is another focus area. “But we want to be more [focused on] knowledge services with the deployment of digital technology,” he says, noting that Malaysia needs to play catch up with regional markets such as Taiwan, South Korea and China in the tech sector.

For the time being, Lee expects the weightage of banking stocks on the FBM KLCI to remain high because of their role as financiers. “If you look at the advanced economies, banking stocks are still the dominant players because they provide financing. Without financing, how can the economy be given a boost?”

He adds that it will be interesting to see how digital banking and financial technology (fintech) will add value to the financial services industry going forward.

Bank Negara Malaysia has indicated plans to issue up to five digital banking licences. Companies keen on a licence include Grab, Axiata Group Bhd, CIMB, Affin Bank Bhd, Hong Leong Bank, AMMB Holdings Bhd, Standard Chartered Bank Malaysia Bhd, Sunway Bhd, Green Packet Bhd, Paramount Corp Bhd, gaming firm Razer Inc, Hong Kong-based investment banking firm AMTD Group and US financial start-up MoneyLion Inc.

Dr Yeah Kim Leng, professor of economics at Sunway University Business School, believes the current challenge for Malaysia is to nurture mega-sized companies in each sector, so they can spearhead their respective industries to reach their potential. “State-owned enterprises do have the potential. It is just that we need the management capability and competency to tap the competitive edge that a particular industry has,” he says.

At the same time, Yeah thinks that getting listed can weaken entities as some lose their motivation to grow larger after they go public. “They [use] the stock market to increase their valuation, but there [is] no strategy to sustain their earnings,” he explains.

Also unavoidable, he adds, is companies seeking a presence in larger markets abroad due to the size constraints of the domestic market. “For example, Top Glove is looking at a listing in Hong Kong to get a pool of international investors for better global recognition.”

Pointing to news reports that say China-based Tencent Holdings Ltd is opening a regional hub in Singapore, Yeah notes that Malaysia has the potential to attract some of the global companies by creating a superior operating environment. “We have plans to attract 100 international companies through an initiative under InvestKL,” he adds.

Coincidentally, last Thursday, InvestKL announced that it had achieved its key performance indicator of attracting and facilitating 100 multinational corporations (MNCs) to set up their regional services hubs in Greater Kuala Lumpur. These MNCs have invested a total of RM15.2 billion and created 13,962 high-skilled jobs in the region.

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