Brokerages, remisiers see income fall to lowest since pandemic
MICHAEL, a broker-dealer who wishes to be identified by only his first name, and his team at a local brokerage firm are spending more time reading the newspapers these days. This was unheard of during the stock market rallies of the past two years, but it has been quiet on the trading front this year.
A host of factors has dragged the stock market down, led by worries over interest rate hikes, surging inflation, the Russia-Ukraine conflict, potential recessions in the US and Europe, and political uncertainty in Malaysia — providing fewer reasons for investors to trade.
Trading activity has waned from the highs of 2020 and 2021, with the average daily traded value (ADTV) of equities dropping 4.8% year to date to RM1.41 billion as at July 20. The ADTV fell 49% to RM2.6 billion in 1Q2022 from RM5.08 billion in 1Q2021. On a quarter-on-quarter basis, the ADTV declined 27% from RM3.55 billion in 4Q2021.
The stock exchange’s market capitalisation fell 4.7% to RM1.648 trillion at end-June from RM1.73 trillion at end-January, Bursa Malaysia data show. On a month-on-month basis, the local bourse lost 7.1% of its value from RM1.774 trillion at end-May.
According to Michael, the first half of 2022 has been an exceptionally trying time for the stockbroking industry amid low trading activity. As his income primarily depends on transaction volumes, his brokerage income for the period was at its lowest level since 2020, falling about 20% from a year ago.
“With the uncertainty in the market, a lot of my institutional clients are staying on the sidelines, preferring to adopt a wait-and-see attitude until the market provides them with greater clarity,” he tells The Edge.
“They are telling us that they are increasing their cash holdings amid growing risks and then deploying them when the time is right. Cash holdings among institutional funds have risen to about 10% to 30%.”
And the sombre mood is expected to continue for the rest of the year, he adds. “Our volume of transactions this year will likely be lower than in the past two years, and this is in line with the overall transaction volume on Bursa. Today, the ADTV has weakened to around RM1 billion to RM1.5 billion compared with an average of RM5 billion to RM7 billion in the past two years and from a peak of RM10.3 billion in 1Q2021.”
Michael believes that if the trading volume doesn’t improve, income for both remisiers and brokerage firms will be affected this year. “Even investment banks are seeing a lot of companies delaying their listing exercise because they are not getting the valuation that they want [in the current market conditions].
“The pipeline of initial public offerings (IPOs) is also smaller this year. I see one or two big IPOs coming up towards the end of the year. But companies are delaying or ‘keeping in view’ (KIV) their listing until maybe later next year when the market improves.”
CGS-CIMB Securities Sdn Bhd CEO Ruzi Rani Ajith says the firm has witnessed a decline in its overall business year on year (y-o-y) as investors remain on the sidelines due to the unattractive valuations in the market. “Institutional clients have been investing outside the country for better returns and we face difficulty in attracting foreign investors to invest in local companies,” she tells The Edge.
“There is also a lack of interest among retail investors to participate in these weak market conditions due to challenges such as rising inflation pressures, more substantial interest rate hikes, a slowdown in China’s economic growth and escalating sanctions related to the Russian invasion of Ukraine. All of these factors will impact our corporate earnings and market sentiment in the second half of 2022.”
CGS-CIMB Securities observes that its retail investors still prefer to trade online as the online participation rate has not changed much between lockdowns and post-pandemic, while others like the high touch, such as talking to their dealer’s representative.
Etiqa Insurance and Takaful chief strategy officer Chris Eng Poh Yoon says, as with the usual summer sell-off, sentiment is very weak in global stock markets. “Malaysia’s market has not been spared either and with the fear of a global recession looming plus the hike in interest rates, there has been a drawdown of global funds in all commodity classes,” he tells The Edge.
Eng notes that as 2020 and 2021 volumes were boosted by money released from Employees Provident Fund accounts and loan moratoriums that in part ended up in the stock market, the lack of new sources of liquidity and the easing of the Covid-19 pandemic — which had seen some foreign interest in the healthcare sector — mean that 2022 as a whole will be weaker in terms of volumes and value on Bursa. This will translate into smaller commissions for brokerage firms, he points out.
Retail participation in the doldrums
A good barometer of activity is staff compensation, and Malaysian stockbrokers are bracing themselves for smaller bonuses this year after the decline in trading activity savaged their firms’ profits. The FBM KLCI had fallen 6.4% year to date to close at 1,450.32 points last Thursday.
“In 2020, commissions for brokers and remisiers hit an all-time high. This was reflected in brokerages’ bonuses that year. This year, it is all about cutting costs. Thus, this year’s bonus will definitely not be good,” says Michael.
A remisier who asked not to be named concurs, noting that her income has halved so far this year from 2020 and 2021 levels, returning to 2019 figures.
“We had a market windfall in the past two years owing to the glove and technology stock mania despite charging a low commission rate of 0.2%. The market made it happen because people began to trade stocks as they were cooped up at home by the pandemic. During that time, brokers also didn’t want to open new trading accounts for customers because there were too many,” she says.
Those days are over. The remisier says retail investors who didn’t cut losses and are still holding on to rubber glove and technology stocks today are not participating in the market anymore.
“Nevertheless, the higher crude palm oil (CPO) prices saw plantation stocks outperform in the first quarter of this year. This helped cushion the lacklustre stock market performance,” she notes.
She says the performances of the companies that made their market debut at the beginning of the year have been fairly good. The more recent ones have not been impressive as their share price closed below their IPO price despite being highly oversubscribed.
Bursa has registered a total of 21 listings on its three markets so far this year. Only three of them were on the Main Market.
Looking at 2H2022, the remisier expects her commission income to dip further — perhaps lower than 2019 levels. She says retail investors, who had turbocharged the equity market during the pandemic, are sharply reducing their participation.
The share of retail investors in the stock market dropped to 27.5% of total trades in 1Q2022, compared with local institutional investors (47.8%) and foreign investors (24.7%), according to Bursa data. Retail investors accounted for 39.5% and 34% of total trades in 1Q2021 and 2020 respectively.
How will brokerage firms fare in 2022?
Total earnings for stockbroking firms are also down this year, showing signs that the trading boom that captivated Bursa in 2020 has run out of steam.
In the first quarter ended March 31 (1QFY2022), Bursa Malaysia Bhd saw a 44% y-o-y decline in net profit to RM67.97 million, while revenue fell 29% y-o-y to RM165.3 million. It is slated to report its 2QFY2022 results on July 28.
CGS-CIMB Research analyst Winson Ng is expecting the stock exchange operator to report another double-digit decline in net profit for 2QFY2022 given the lower ADTV in the equity market.
“The equity ADTV dwindled 41.9% y-o-y to RM2.24 billion in 2Q2022, representing the fourth consecutive quarter of 40% to 50% y-o-y decline. On a quarter-on-quarter basis, the equity ADTV fell 15.8%,” he said in a July 14 note.
“We estimate that Bursa Malaysia’s net profit declined 48.2% y-o-y to RM46.1 million in 2QFY2022 due to: (i) a 41.9% y-o-y drop in equity income (in line with the decline in equity ADTV); and (ii) higher effective tax rate of 33% in 2QFY2022 (versus 25.4% in 2QFY2021) lifted by the one-off Cukai Makmur (prosperity tax).”
For the full year of 2022, the research firm is projecting a 34.1% drop in the equity ADTV this year, with a smaller y-o-y reduction in 2H2022.
Bursa Malaysia recorded its best ever net profit of RM377.7 million in the financial year ended Dec 31, 2020 (FY2020), which declined 6% to RM355.3 million in FY2021. It declared a dividend of 51 sen per share and 41 sen per share in FY2020 and FY2021 respectively.
Bursa Malaysia’s share price is down 2.3% year to date, having closed at RM6.40 last Thursday, reducing its market capitalisation to RM5.18 billion.
Ng has upgraded Bursa Malaysia’s stock to a “hold” from “reduce”, as it is trading below its five-year historical average price-earnings ratio (PER) of 21.1 times, with a target price of RM6.59. This implies an upside potential of 3% from last Thursday’s closing price.
Likewise, Kenanga Investment Bank Bhd (KIBB) reported a 51% y-o-y decline in net profit to RM16.7 million for the three months ended March 31 on lower contribution from brokerage fee income, as well as trading and investment income. Revenue fell 26% from a year ago to RM184.9 million.
KIBB’s share price had fallen 20% year to date to close at 88.5 sen last Thursday, giving the company a market capitalisation of RM643.4 million. The stock is trading at a price-to-book value of 0.65 times.
To recap, KIBB posted a record net profit of RM118.39 million in the financial year ended Dec 31, 2021 (FY2021), a 16% y-o-y increase. It declared a dividend of 10.5 sen per share, the highest since becoming an investment bank.
This was partly boosted by its 50%-owned joint venture with Japan-based Rakuten Securities Inc — Rakuten Trade Sdn Bhd, which emerged as one of the key beneficiaries in 2020’s online retail trading boom due to the pandemic. The online retail brokerage recorded its first profitable year since its launch in May 2017 in the financial year ended Dec 31, 2020 (FY2020), with a net profit of RM18.44 million.
Rakuten Trade posted its second straight yearly profit of RM14.53 million in FY2021, but was down 21% from FY2020, data provided by the Companies Commission of Malaysia show.
Rakuten Trade CEO Kazumasa Mise says the brokerage firm is anticipating lower retail participation this year.
“The pandemic triggered a surge in digital adoption and this growth trend has not waned despite many now moving back into a work-from-office framework, with the reopening of borders and concerns around a possible economic downturn. As a result, almost 15,000 trading accounts were activated in 1H2022,” he says in an email response to questions from The Edge.
“Since business day 1, we have activated over 250,000 accounts [as at June 30] and we anticipate this number to grow to about 275,000 accounts by year end,” he adds.
Rakuten Trade continues to look at ways to scale its education efforts by focusing on tutorials and trading insights that appeal to different types of investors with different trading strategies. “In terms of trading behaviour, our beginner investors, who cultivated their digital trading experience in the last two years, are now looking at ways to diversify their portfolio, either by trading in both Malaysian and US markets or by including stocks from other sectors,” says Mise.
In an effort to jumpstart revenue and user growth, Rakuten Trade has been introducing new products and features. The company announced in January that it had launched a foreign share trading service beginning with the US market.
“Since we launched the US trading, we have received overwhelming response from investors, resulting in strong and steady trading growth on the New York Stock Exchange and Nasdaq. It has also acted as a catalyst for new investors to test trading strategies on Bursa before diversifying into the US,” he says.
“We will soon debut Rakuten Trade’s foreign currency settlement service that offers investors the flexibility to trade on the US market in either ringgit or US dollar. Thereafter, we will be adding Hong Kong as the second foreign trading market.”
CGS-CIMB Securities’ Ruzi says the firm is currently working on a few initiatives to ease the impact of low trading activity. These include cost control measures and streamlining its processes, promoting products that generate recurring interest income like margin financing and margin lite and advisory fees, and diversifying into retail wealth products such as discretionary trading.
The firm is also collaborating with more partners to expand its offerings. It is one of the leading brokerage firms to have adopted environmental, social and governance (ESG) criteria in its processes and equities-related activities such as research reports and sustainable standards.
Is the stock market party over?
Malaysia’s stock market has undergone a correction this year amid heightened inflation and interest rate hikes. As at end-June, Bursa Malaysia’s market capitalisation had shrunk to RM1.65 trillion, from its RM1.84 trillion high in October 2021.
While industry experts may have differing views on whether the stock market will bounce back this year, they concur that investors are unlikely to see a repeat of the good times that started in 2020 and carried over into 2021.
Some experts, such as Kenanga Research analyst Clement Chua, believe that investor wariness will persist in the short term.
“We believe trading volumes will remain depressed as investors are sidelined by uninspiring global macroeconomics and softer sentiment. Positive catalysts may only materialise in the medium term,” he said in a July 15 report.
Chua had initially forecast Bursa Malaysia’s average daily traded value (ADTV) coming in at RM2.7 billion in 2022 and RM2.6 billion in 2023, from RM3.55 billion last year.
“But now (we) opine that levels of RM2 billion and RM2.1 billion are more likely (in 2022 and 2023 respectively). Global macroeconomics remain unfavourable with recent US inflation rising to 9.1% as of June 2022. Locally, while we hope for sequentially better gross domestic product numbers from our reopened economy, recessionary concerns may dissuade foreign participation.
“Additionally, retail investors may progressively retreat towards safer long-term investment and savings products as Bank Negara Malaysia is expected to continue raising the overnight policy rate (another two 25-basis-point hikes are expected). This only swells the risk-reward for margin trading unfavourably. We continue to expect weakness in trading activities as the two previous years’ heyday of heavy trading of healthcare-related stocks is not likely to reoccur.
“That said, we believe that much needed positive catalysts could range from: (i) favourable resolution of the Russia-Ukraine conflict, albeit the sentimental boost may not be long-lasting as the mending of economic damage would be a medium-term endeavour; (ii) earlier-than-expected general elections (that is, pre-2023); and (iii) sustained growth in commodity prices to support trading in the beneficiaries,” he said.
CGS-CIMB Securities Sdn Bhd CEO Ruzi Rani Ajith concurs. She expects the market to remain weak with downside risks in 3Q2022 as it attempts to price in concerns over global monetary policy tightening.
“Overall, we expect the market to stay volatile in 2H2022, unless there is some clarity on concerns and uncertainties facing the local and global markets,” she says.
Meanwhile, a broker-dealer at a local brokerage firm who wishes to be identified as just Michael, expects volume on Bursa Malaysia to pick up towards the end of the year or at the beginning of 2023.
“I think this listless trading will remain at least for the next six months. Perhaps in January, when people reshuffle their portfolio and look forward to 2023/24 earnings, then they would increase their participation in the stock market.
“But until then, you have political uncertainty in the country with an impending general election, which is putting foreign funds off the local stock market. Then there is the war in Ukraine and interest rate hikes in the face of inflationary pressure,” he says.
Rakuten Trade Sdn Bhd CEO Kazumasa Mise notes, however, that its online retail brokerage’s research team believes the local bourse could see further upside in the second half of the year with prevailing low valuations, continuation of foreign inflows and better-than-expected earnings prospects being the main reasons.
“Their ‘overweight’ sectoral picks would include the gaming sector, real estate investment trusts as a post-Covid-19 recovery play, technology, banking and utility stocks,” he tells The Edge.
Etiqa Insurance and Takaful chief strategy officer Chris Eng Poh Yoon sees ADTV for equities improving in 4Q2022 when the inflation and recession fears ease.
“While there still remains much uncertainty with regards to energy inflation as we move into the northern hemisphere winter, we believe that expectations on interest rates will wane as core inflation in the US eases — although headline inflation may remain high. Market liquidity will then rise as interest rate fears ease, and this should lead to a rebound in markets and trading volumes, although with the higher cost of financing, we doubt that trading volumes will reach 2021 highs,” he says.
Malaysian brokerages not alone in the gloom
Worries about rising borrowing costs and inflation have also hammered global financial markets this year and impacted foreign brokerage firms such as JPMorgan Chase and Robinhood Markets Inc.
New York-based JPMorgan saw second-quarter profit decline 28% from a year earlier to US$8.65 billion (RM38.6 billion).
It was reported that the slowdown in Wall Street deals stung JPMorgan, which has one of the biggest operations on the Street. Investment banking fees fell 54% to US$1.65 billion in 2Q2022. Revenue in that division was impacted by US$257 million in markdowns on positions held in the firm’s bridge loans portfolio, according to reports.
Retail brokerage firm Robinhood, meanwhile, reported a smaller loss and revenue for the first quarter ended March 31, 2022, showing signs that the trading boom that gripped Wall Street a year ago may have run out of steam.
Robinhood said its loss narrowed to US$392 million, from a loss of US$1.4 billion a year ago. Revenue fell 43% year on year to US$299 million.
Robinhood also said its monthly active users declined to 15.9 million, from 17.7 million in the year-ago period and 17.3 million in the previous quarter. It went public in July 2021 at US$38 per share, but the stock has struggled to find traction. It closed at US$9.41 per share last Wednesday.
An analyst from a local brokerage says as the stock market tends to be cyclical, bargain hunting will emerge after a selldown, and “when there is money to be made, investors will surely return then”.
“When the music is heard again, retail investors will be ready to put on their dancing shoes once more. Until then, we just have to wait out the current lull,” he adds.
Brokerages, remisiers see income fall to lowest since pandemic