Most Malaysian investors that I have met have one thing in common. We tend to invest locally. We avoid investing in foreign markets because it seems risky.
Starting out by investing locally is a great way to get ourselves familiar with the stock market. However, as we progress, we should consider diversifying our portfolio internationally Here’s three reasons why you should consider investing abroad.
- Access to more high-quality companies
There are about 41,000 listed companies in the world with a combined market value of more than US$80 trillion. In comparison, there are only 900+ companies listed in Malaysia. The number of good companies (or even a potentially great ones) are many times more than in Malaysia.
Additionally, Malaysia has only a few great entrepreneurs who have built high-quality companies that have compounded shareholder value over the past decades. Till today, the Malaysian government has a strong hand in shaping our local economy and the stock market.
Let’s examine the thirty companies of the FTSE Bursa Malaysia KLCI (FBM KLCI). More than one-third of the entities on this list are government-controlled. Four of those companies, namely
- MISC Bhd (KLSE: MISC),
- Petronas Chemicals Group Bhd (KLSE: PCHEM),
- Petronas Dagangan Berhad (KLSE: PETDAG) and
- Petronas Gas Bhd (KLSE: PETGAS)
are linked to the national oil company, Petroliam Nasional Berhad (PETRONAS).
Our local stock market also lacks companies of the future. The world has entered the information age. However, the largest companies on Bursa Malaysia are in traditional businesses like banking, industrial and commodity.
Contrast this with investing in the US or China markets. The choices are plentiful. Both countries are home to world-class technology companies like Apple Inc. (NASDAQ.AAPL), Amazon.com, Inc. (NASDAQ.AMZN) or even Tencent Holdings Ltd (HKG.0700). Would you invest in these wonderful businesses, even though they are not listed in your home exchange?
- More growth opportunities abroad
There is a reason why most of the largest companies in the world are located in larger markets like the US or China. The market size in these countries is significantly larger, providing companies long runways to grow.
Malaysia has a population size of 32 million people. In comparison, the US has a population of 320 million, almost 10 times the size of Malaysia. China is the most populous country in the world, with a population size of 1.4 billion people! A home-grown champion from either country would easily dwarf a local champion from Malaysia. Most Malaysian companies have limitation on how much they can grow locally.
Let’s take Dutch Lady Milk Industries Bhd (KLSE: DLADY), as an example. The company serves only the Malaysian market. It has not been able to grow its sales meaningfully over the past few years. Preferences are changing among local consumers. Additionally, rising raw milk prices and the weaken Ringgit have affected its profitability. After 66 years in the country, Dutch Lady Milk Industries has a market capitalisation of RM2.67 billion.
If we look at China’s largest dairy company, Inner Mongolia Yili Industrial Group Co. (SHA:600887) has seen uninterrupted sales growth from 1996 to 2018. Yili owns the largest scale and the most complete product line in the China dairy industry. It is the No.1 dairy enterprise in Asia, with a current market capitalisation of RMB181.9 billion (RM 110.9 Billion). That is 42 times larger than Dutch Lady Milk Industries. In this respect, market size does matter.
Furthermore, as the world becoming more globalised, our local companies will struggle to compete with international giants. Take our local listed retailers, Aeon Co. (M) Bhd (KLSE:AEON) and Parkson Holdings Bhd (KLSE:PARKSON). Both companies are struggling due to the rise of e-commerce. Interestingly the largest e-commerce players in Malaysia now are managed by international firms like Alibaba Group (NYSE:BABA) (HKG:9988) and SEA Ltd (NYSE:SE).
Investors are more willing to pay up for companies with massive growth opportunities. The 2019 OECD report, Owners of the World’s Listed Companies, found that while only 10% of the world’s listed companies are listed in the US, it holds 36% of the global market value. The US also has the largest listed companies in terms of market capitalisation.
- Diversification of political and currency risk
Volatility is part and parcel of investing. As investors, our goal is to minimize the amount of risk we assume in the stock market.
In recent years, Bursa Malaysia faced huge volatility due to geopolitical uncertainty. In 2019, foreign investors dumped RM11.14 billion worth of domestic equities, making it the largest sell-down among Asian markets. The FBM KLIC was also the worst-performing market in the region for most of last year. This might be due to the 1MDB scandal, the unexpected 14th General Election in 2018 and subdued global growth. Even now, Malaysia is facing yet another political crisis following the collapse of the Pakatan Harapan (PH) government. These are unnerving times for the people and investors in general.
Then there is the volatility of the Malaysian Ringgit. Look at the 5-year USD/MYR chart below, it is certainly not for the faint-hearted.
Five years ago, you would need 3.70 Malaysian Ringgits to get 1 US dollar. Today, you would need to pay 4.20 Malaysian Ringgits to get the same US dollar. Import costs are now more expensive. Purchasing power has certainty been eroded with increased living costs.
On the flip side, Malaysians who have invested in US stocks saw their investments appreciate by 13.5% on currency appreciation alone.
Yes, politics are usually complicated and unpredictable. Currency movements are also not easy to forecast. Nevertheless, history has shown a politically and economically stable country is better for investors.
As investors, we might feel that we are in control when investing in a familiar environment. But this can be an illusion based on the points discussed above. The personal connection should not be the sole deciding factor for any investment that you make.
Let’s be clear. We are not saying that there are no good companies to be found in Bursa Malaysia. Neither are we suggesting that you completely give up our local stock exchange. We know that there are multi-baggers to be found here like Panasonic Manufacturing Malaysia Berhad (KLSE:PANAMY). The issue is that such companies are few and far between.
When we widen our view, the world can be our oyster.