The global economy faces a dual challenge of a sharp rise in the price of oil and other commodities, and a credit crisis of potentially colossal proportions. All this is leading to rising inflation and imminently lower and even negative growth rates. In Malaysia, there is also a political battle raging, leading to great turbulence and uncertainty. At the same time we see a rise in companies exposed on accounting irregularities. I see these as ingredients of an economic “perfect storm”!

Enhancing the quality of corporate reporting and investor communications

Lately we see a number of companies exposed on accounting irregularities. It may be argued that the size of the companies is small, the number of companies is few and their combined market capitalization is a mere drop in the bucket compared to the size of the market. However, this doesn’t help the perception of the quality of the market.

While many companies have exemplary corporate governance and excellent IR practices, the actions of a few companies abusing the market has affected investor sentiment. We would like to see not only improvement in the practice of IR but also quality in levels of disclosure, in its breadth and depth. There is no point in having regular communication and engagement if the quality of reporting is lacking.

For example, we want to see more clarity in balance sheet items (such as overstated receivables and off-balance sheet entities). Good IR covers quality of disclosure as well.

What the foreign investors are hearing, and not hearing

Among foreign investors, there is a perception that the Malaysian business environment is dependent on government contracts and government pump-priming and fiscal policies. This perception is not always true and certainly not applicable to all sectors. However, such a perception, given the current political uncertainty, has caused investors, especially foreign investors, to take flight.

Foreign investors are rebalancing their portfolios in these uncertain times. Nevertheless, in spite of uncertainty, they continue allocating funds but are more judicious in choosing their preferred asset classes. How and where they place their funds is dependent on the outlook in the sector or region.

I met a few global fund managers whose asset holdings are so enormous it’s dizzying! I noticed that some foreign funds are still bullish on emerging market investments, which are perceived to be volatile but offer above average returns. Some foreign investors are prepared to allocate a small portion of their portfolio, but sufficiently large by our standards, in spite of these risks.

Foreign investors are not hearing enough on why they should stay in the market and we urge listed companies to continue engaging investors even during this period of uncertainty.

Eddie Razak
August 2008