Malaysian Stock Exchange

Chapter 1: Introduction

According to Jaffe and Westerfield (1985), stock market return demonstrate strong independence. Investors watch news closely on the ways markets react and apply relevant knowledge which forms the basis of their strategies in stock investment. Government and the central bank of Malaysia, Bank Negara have been constantly monitoring macroeconomics related news of the growing economy size which is in accordance to Vision 2020 to achieve developed nation status in 2020. This is to ensure the economy stability and protect the interest to the nation. Since the studying of causal relationship between macroeconomic factors and the equity market is limited, this study focuses on how interest rate, exchange rate, money supply and oil price affect Kuala Lumpur Composite Index (KLCI) stock market return.

This chapter is structured in the following manner: Section 1.1 refers to the background of the research and section 1.2 is the problem statement. Section 1.3 and section 1.4 consist of research questions and research objectives respectively. Section 1.5 is the significance of study while section 1.6 refers to the scope of study. Section 1.7 contains the operational definitions and section 1.8 includes the proposed chapters for the entire paper.

Research Background

Malaysia stock market was initially established in 1960 as Malaysian Stock Exchange. In 1970, Kuala Lumpur Stock Exchange Berhad (KLSEB) was set up following the separation of Singapore from Malaysia. Subsequently, KLSEB was renamed as Bursa Malaysia as the result of demutualization exercise in 2004 where the exchange is now listed in the market and owned by the shareholders. Bursa Malaysia comprises the Main Board, the Second Board and The Malaysian Exchange of Securities Dealing and Quotation Berhad (MESDAQ). The Main Board serves as a funding and investing platform for larger capitalized firms. The Second Board is for relatively smaller capitalized companies while MESDAQ serves as a platform for technology and high growth firms (Chong & Puah, 2009). In August 2009, Main Board and Second Board were merged to form Main Market while MESDAQ is renamed to Ace Market and the eligible firms have been expanded to all sectors (Securities Commission Malaysia, 2009).

The size of Bursa Malaysia was valued at RM 43 billion in the 1980s (Chong & Puah, 2009) and the amount grew significantly to RM 2.17 trillion as in 2014 (Securities Commission Malaysia, 2015). The performance of stock market is indicated by KLCI which is a weighted is a capitalization weighted index. Although KLCI has been trending upwards since its establishment, the index movement is volatile. KLCI experienced significant losses in two major events over the past ten years; 40% value was lost during subprime mortgage crisis in 2008 (Angabini & Wasiuzzaman, 2011) and 16% from highest point in 2014 due to probable Quantitative Easing program (QE) tapering by The Federal Reserve coupled with the significant slump in oil prices. 30 components of KLCI is provided in Appendix 1.

Thus, Bursa Malaysia is vital to foster capital formation and sustaining economic growth in Malaysia (Heng et al., 2012). It serves as a forum to facilitate financial transactions through the creation, transfer and sale of financial securities which can benefit various parties. The primary market allows issuance of financial instruments such as stocks and bonds to the investors which is known as Initial Public Offering, IPO. Secondary market provides liquidity by allowing issued instruments to be traded between investors. Government will be able to raise funds for country developments; both retail and institutional investors can participate in the financial market to grow their wealth and to achieve their respective goals (Gan, 2010).

Nevertheless, the sentiment and strategy of investors are affected by the changes in the macroeconomic factors due to the fear of shrinking portfolio returns. Numerous studies had been carried out to verify the relationship between those changes and investors’ returns. However, most of the studies are carried out in developed countries and large economic nations instead of in emerging markets such as Malaysia. Thus, this study aims to extend the existing studies to include the impact of several macroeconomics determinants namely interest rate, exchange rate, money supply and oil price on KLCI stock market return.

Problem Statement

Stock market is a place for firms to raise capital for their businesses and it plays a significant role in stimulating a nation’s economy and improving the overall lifestyle of a society. Skyrocketing inflation coupled with depreciation of local currency against foreign currencies have forced more investors to venture into stock market to seek for greater return in order to preserve their wealth. However, stock market is notoriously known for its volatility and the market often reacts to changes in macroeconomic determinants and sometimes for some illogical reasons. As the result, investors and firms may fail to obtain their desired return from their investments. Statistics in DALBAR’s