Since the launch of a new M$10 billion ($2.6 billion) government fund in January, the Kuala Lumpur Stock Exchange Composite Index (KLCI) has risen 2.3%.
The fund, called ValueCap, is controlled by two large government investment vehicles, Khazanah Nasional and Permodalan Nasional, and by Kumpulan Wang Amanah Pencen, the civil servants’ pension fund.
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According to the finance ministry, ValueCap is supposed to buy undervalued shares and improve liquidity in the stock market.
CIMB Research, the research arm of local investment bank CIMB, estimates that the fund constitutes 3.4 % of KLCI’s market capitalization and approximately 31 trading days’ volume (based on a three-month average).
Investors are divided as to whether the government’s intervention is positive for the market and worried by a lack of clarity in the fund’s investment objectives. “ValueCap is supposed to buy undervalued stocks but what happens if they become overvalued?” asks the head of a foreign brokerage’s Malaysian office. Some foreign investors are also concerned that ValueCap could be used to support ailing firms with strong political connections. If it is used in this way they fear the fund could damage the economy in the long run.
But the Malaysian government already controls a number of large investment funds that it could exploit in this way if it chose, so establishing a new high-profile fund to do so makes little sense. The sentiment among local investors is more that ValueCap will act as an independent fund focused on delivering returns to shareholders but with a different risk profile to the other government funds.
Although the long-term impact of the fund is uncertain, the short-term impact has been substantial. But even as the market has rallied following the fund’s launch, it’s far from clear how active it has been. Brokers’ estimates for the amount it has actually invested so far range between just M$40 million to M$100 million to “under one billion”. With estimates varying that wildly, ValueCap perhaps deserves some early credit for its secrecy in dealing.
The major impact of the fund appears to have been on other investors, who have become scared of missing out on the market upside. Investors know there is M$10 billion out there waiting to move in but they don’t know when or where and so are just piling in to avoid losing out.
Liquidity has also improved substantially since ValueCap began investing. According to TA Securities, a local brokerage, daily volume has increased from 130 million shares to between 300 million and 400 million shares since the fund announced it had begun operations.
Estimates for the impact that ValueCap will have on the market and the economy once it is fully invested also vary. Local research houses estimate that the M$10 billion injection could send the KLCI up nearly 20% to 750 and that this could add 2% to Malaysia’s GDP growth in 2003. Estimates are based on the market’s experience of Kazanah’s bail-out of the troubled UEM group in July 2001 when M$3.7 billion was suddenly injected into the market.
But any estimate of how the fund will affect the market and the economy must be tempered by global economic conditions, which always weigh heavily on export-oriented Malaysia.
Growth estimates for 2003 vary from 4.5% to 6.5% as uncertainty about the economy of the US, Malaysia’s largest trading partner, and tensions over Iraq dampen confidence.
