How have conventional funds performed versus Shariah funds?
JALIL: When we look at conventional and Islamic funds, it’s very difficult to make a comparison. It is not an apple to an apple comparison. So it is very difficult to see how one has outperformed against the other. If you look at it from an absolute performance point of view, let’s say if you look at 10 years back, how much cumulative return an Islamic portfolio would have done in a particular strategy versus the conventional in the same strategy, the Shariah funds would have returned more. This is because they were not exposed to the financial sectors during the 2007/08 financial crisis. However, it does not mean that this phenomenon will continue to recur every year. We are also looking at it versus the benchmark. For example, it is very difficult to say one is outperforming the other because the benchmarks used is different for Shariah funds, as well as for conventional. I would say that it really depends on the risk appetite. Shariah funds generally perform better during the downturn, because the more leveraged stock would tend to crash during that time and Shariah funds would prohibit the fund managers from holding those leveraged stocks. Likewise, the banks would get hit during the downturn simply because there's a knee jerk reaction that the industry will be affected due to its close relation to the economy. The Shariah funds would not have the banks exposure. Vice versa, when the market starts rising, it is these leveraged stocks and banks that would rise and the Shariah fund would not have exposure to these funds. So it really depends what point of the market we are looking at.
What are the most noticeable trends brought about by the Western debt crises? How does Aberdeen approach such trends?
JALIL: Generally, we have been seeing more in Asian assets, but we are a bottom–up fund manager, so we don’t look at the macro perspective. If we look at the performance of European equity, it has done really well, simply because during the crisis we are able to buy companies such as Nestlé, Unilever, and all these blue chip multinationals at a valuation of about 12 to 16 times, whereas their listed subsidiaries in Asia, for example, Nestlé Malaysia is trading at almost 35 times above the price or Unilever Indonesia, which is trading at 40 times above the price. So it has been a very interesting reversal process. 10 years ago you probably would have found that buying the listed parent in Europe would be expensive compare to the subsidiary in Asia, but now things have changed. So we find a lot of opportunities, a lot of value in Europe, in North America, from a bottom-up perspective. Thus, our approach is to look at things stock by stock. We don’t look at the country and then say “Great, I am going to have everything in Europe or in Asia right now.” We look at stocks from an individual perspective.
The financial sector this year has been very active in Malaysia. What is your projection for Malaysian capital markets going forward?
JALIL: I think 2012 was an abnormality because we saw Malaysia being the 3rd largest IPO market in the world and this is obviously not something that can be sustained year after year. If we look at the IPO market this year, a lot of the largest issuances in Hong Kong and Singapore pulled out, mainly because the issuing corporates felt that they couldn’t get the right valuation or that they could not even raise the amount that they wanted. However, the IPOs in Malaysia took off because a lot of companies felt here that they could get the valuation and raise money from the government institutions. As a bottom-up fund manager we don’t really make projections on the macro front, but I think that the Malaysian market will be quite strong, bearing in mind that next year is an election year, so there will be that natural “feel good factor” coming through, at least until the elections. Malaysia has a lot of liquidity in the market; a lot of the government institutions have a lot of cash, IPOs seem to be snapped up quite quickly, and bonds that have issued seem to have a very good take up rate. Thus, I think the Malaysian market is healthy, at least until some difficult structural decisions start to come in, such as removing subsidies, for example. I think that one thing that investors are probably realizing in Malaysia now, or rather something which they realized when the world or Asia was going into an economic crisis about 3/4 years ago, is that companies in Malaysia are safe. They are not the most exciting companies in the world, they may be a bit boring from a group perspective, but they are safe. They pay a good dividend yield, they are decently run, and the quality of corporate governance is relatively better than some of the neighboring countries, so there are a lot of positive factors in Malaysia. However, in order to be able to look at the positives you must have a presence on the ground and really be doing the hard work, kicking the tires, meeting people and speaking to them, and understanding the country. So the positive thing is that Malaysia has a lot to offer in terms of companies.
Which indicators are showing the most positive trends and which remain challenges?
JALIL: The challenge for Malaysia is that the depth of options available is not there. If you look at the top 20 stocks in the Malaysian stock market, it has not changed a lot in terms of composition over the last 10 years. We have seen some new large companies that have been created, such as Axiata and AirAsia, come into the index, but largely the index still contains the same names. So what would be interesting to see are the existing names 10 years from now, as they become larger and larger and are no longer focused on Malaysia, but becoming some regional giant in their own sectors, taking as an example CIMB, or Maybank. In terms of sectors, financial services aside, the consumer sector is doing really well here. We are shareholders of some companies like AEON for example, who run a chain of department stores and supermarkets. Their focus is on the mass market, which is in a way, recession proof simply because if there is a recession people still need to go out and buy the daily goods, so it is relatively unaffected. Companies such as Nestlé, who sell beverages and food, see a lot of decent growth coming in. From our stock market company point of view, the challenge for Malaysia is to increase that depth of companies in the same size with decent liquidity. The companies that are well run, we find, are not very liquid, because they are quite tightly held by the major shareholders, leaving a very small portion for institutional investors, like ourselves, to be able to invest. There is a lot more that Malaysia can do from a corporate governance perspective. Malaysia is relatively better in comparison to its neighbouring countries, but it is not the best and I think that this is something that even the government acknowledges and, credit to them, they are doing a lot of initiatives there. An example would be the way AGMs are conducted in the country, there can be more interaction between shareholders, a better definition of independent directors, and new breed of directors coming through younger, more professional, more industry relevant. We would like to see those things coming on.
The Malaysian government has recently released the new budget for 2013. What provisions have been provided to strengthen Malaysian capital markets?
JALIL: The recent budget announcement did not have too many items on the capital markets, simply because there had been a lot more announcements made specifically for the capital markets in previous budget announcements. Also, a lot of the announcements related to the capital markets had been made outside of the budget announcement. For example, there was an announcement specifically made to enhance the sukuk market, the Islamic bond market, to help the agricultural industry, that is the agro-sukuk. In the latest announcement, we see more cash and tax incentives being given to companies that opt to raise money through the sukuk method, rather than the conventional fixed income method. So we see more incentives coming through, but I think, over the last 5 years, I have seen a lot of announcements and incentives being given and this is probably a richer period, where we are waiting for that to bed in and show result. The government has been selectively giving incentives to boost areas of the capital market, which is probably not growing as fast as it should.
One of the biggest challenges for the government is the deficit. How sustainable are the current tax provisions?
JALIL: Malaysia’s tax base is rather narrow, which is why it is very important to introduce goods and service tax in tandem with a reduction in corporate and personal income tax. You must put more money in people’s pockets and allow people to spend that money on things that they want, but the more they consume, the more they pay, rather than paying X amount every month and then not paying at all for anything. Currently things are subsidized, so if you drive a RM 1 million car, you still pay the same amount for fuel and everything else. So you see that people with different earning power are not paying different levels of tax. Some very difficult structural decisions need to be made, such as removal of subsidies and the introduction of consumption tax. These things surely will not be the most popular decisions, but it is something that Malaysia needs to do for the longer term.
To a large extent, Malaysia is financing the Economic Transformation Programme (ETP) through government-linked companies. What are your thoughts on that method of financing? Is the government guarantee on bonds a positive mechanism?
JALIL: The ETP is largely financed by the private sector, but if we look at the private sector in Malaysia, there is a large conglomerate, and the owners of this large conglomerate are somewhat linked back to the government. Obviously, coming from a free market point of view, we would like to see more bonds being taken up by non-government-linked entities, simply because I do not think that the government should be guaranteeing bonds for public infrastructure projects. If a project is commercially viable and can stand alone, on its own two feet, it should be getting response and interest from non-government entities, without the need of the government. The simple logic being that the government in Malaysia faces one of its biggest challenges, that is the deficit position, which is above 50%, and including the contingent liability, it is slightly more. Therefore, Malaysia first needs to make sure that it is not guaranteeing too many bonds that it should not be guaranteeing then bring down its external financing, which eventually would have to stop, and ultimately impose a better tax base as well as cutting down on subsidies.
We have probably lost the vibrancy of the stock market that existed before the Asian financial crisis. There used to be a time when the Malaysian stock market used to trade more than the New York stock exchange on a daily level. Those days are gone. Simply said, we need to reinvent, we need to make Malaysia more relevant.
How effective has Malaysia been at diversifying its economy away from natural resources?
JALIL: Malaysia relies perhaps a bit too much on oil and gas and this is probably the curse of having natural resources. Countries that do not have natural resources tend to do better because they are forced to innovate, find ways to grow their revenue, and not give out national assets too cheaply. But I guess when you have too much natural resources, the tendency is there to perhaps be a bit generous with them, without trying to find, for example, alternative fuels, and innovate more. Malaysia, as an exporting country in terms of oil and palm oil, probably exports too much in its raw form, without focusing on a lot of the value added services where the oil or oil bio-products can be used. It is even more prevalent in palm oil. I think we export too much in its raw form to countries which do a better job at having a multi-billion industry making finished goods and selling it back to Malaysia. So these are sectors that Malaysia needs to grow in order to diversify its earning base.
What would be the outcome of a credit downgrade for Malaysia?
JALIL: A credit downgrade would affect Malaysia from a fixed income point of view. I am not sure how much of the Malaysian bonds are held by foreigners, but when there is a credit downgrade, the first to sell are the foreigners. At the same time, you would have quite a large chunk of bonds held by the government institutions. They would probably still hold on to it, but I guess that is a worry, because every time there is a warning or indication from the credit firms that Malaysia may be downgraded, the government comes out by saying “You know, I think that is unfair, we are not that bad, we are doing a lot of initiatives to fix the situation and to bring the debt down.”
How competitive is Kuala Lumpur as a financial centre?
JALIL: Nowadays, the challenge for Malaysia is that a lot of other markets are becoming bigger and they are opening up, which will make Malaysia smaller and smaller. Malaysia in the mid ‘90s, before the Asian financial crisis, used to have a weighting of maybe 20-25% in the Asian index, which simply meant that if you had $100 to invest in Asia, about $20-25 would be invested in Malaysia. Malaysia is now weighting about 2-3%. That means that the same $25 would have been shrunk to just $2. There are a few reasons to explain this. Back in the 1990s, India, Korea, and China were closed. 15-20 years ago, you would find about 4/5 invest-able companies, whereas now you have many invest-able companies within the same region. So Malaysia has shrunk in a relative term but increased from an absolute term. But so has the rest of the region. We have probably lost the vibrancy of the stock market that existed before the Asian financial crisis. There used to be a time when the Malaysian stock market used to trade more than the New York stock exchange on a daily level. Those days are gone. Simply said, we need to reinvent, we need to make Malaysia more relevant. If you look at Malaysia compared to Singapore and Hong Kong, these attract international companies, whereas the companies in Malaysia are still predominantly local. They have done well to move outside, but you don’t see non-Malaysian names coming to list in Malaysia, because they feel that they get a better, wider investor base in Singapore or Hong Kong.
In what ways does Malaysia stand out at a regional level?
JALIL: From a country perspective, Malaysia probably needs to find a niche for himself. Thailand is somewhat the Detroit of South East Asia, Singapore is a financial hub, Indonesia is good with the commodities, Philippines is probably a bit forgotten but coming up in a big way with a very large foreign workers market who repatriate a lot of money, a lot of good consumers companies are coming through there. So Malaysia needs to find a niche, which is why, I think, the government has identified things like oil and gas, for example, and Islamic finance, a key area where they can establish a niche for themselves, which is the right thing to do.