Comparison of Malaysia Thailand and Singapore using economic measures

1.0 Background

Stock return composed of the profits and increases in prices. It is important for investors and business organizations to identify the company’s shareholder value and investment returns, and the decision of whether to choose a particular stock is one of the most important implications of the share price. A lot of models and techniques have been put and used by investors to help them get the best returns on investment in their equity.

The capital asset pricing model, which was developed in 1960 uses the mid-market different assumptions about investor behavior and to provide a balance of conditions that allow us to predict the return of the asset to the level of risk (or no diversifiable) methodology. The CAPM uses a measure of systematic risk which can be compared with other assets in the market. You can use this measure of the dangers of allowing investors from theory to improve their portfolios and managers to find the required rate of return. [1] 

CAPM developed by Sharpe (1964) and Linter (1965) find the first model, which explains the theory of the impact of non-diversifiable market risk on return. Model estimates the expected return of stock. Non-diversifiable risk is the risk factor only, which is used in the model, which is represented in the form of beta CAPM.

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In addition, Interest rates, inflation and foreign exchange rates are the key variables of the macroeconomy in any economy. Interest rate is the rate of borrowing, or can also be defined as the cost of money. Has a very big role in the economy. And any change in interest rates causing a problem for investors. According to Ahmad el (2010), there are types of interest rates several available in the economy, including the short-term and long-term rates. Currency exchange rate on the other hand is the rate that can convert one currency to another currency. Such as interest rate and exchange rate variable is also very important to the success of any economy.

Can import and export of the country suffer if the exchange rate changes suddenly. This takes two variables beyond the control of any company, the business you always want to change steadily in this variable. Because it cannot change fast in this variable affect the profitability and revenue for the company. This is the very reason; we often see large fluctuations in the stock market if it was observed no change in this variable.

Islam (2003), find replicated the above studies to examine the short-run dynamic adjustment and the long-run equilibrium relationships between three macroeconomic variables (interest rate, inflation rate, exchange rate). the Kuala Lumpur Stock Exchange (KLSE) Composite Index. His conclusions were similar: there existed statistically significant short-run (dynamic) and long-run (equilibrium) relationships among the macroeconomic variables and the KLSE stock returns.

According to Fama and French (1992), there is significant relationship between book to market value and stock return. They also find that stock return is associated with price to earnings ratio. Stattman (1980) finds a positive relationship between book to market ratio and expected stock return. Poterba and Summers (1988) report negative relationship long-run between PE and RE. Drew et al (2003) finds that market beta alone is not sufficient to describe the variation in average equity return; there is a statistically significant non-beta risk associated with book to market equity. Rahmani et al (2006) asserts that there is significant relationship between earning to price ratio and the stock return.

Charles et al (2008), estimated exchange rate effect in the stock market in Ghana. By taking the Treasury bill rates, save money, foreign exchange rate and inflation, the trade deficit and the independent variables, using the exponential generalized Heteroskedascity Conditional Autoregressive (EGARCH) and stated that there is a positive relationship between stock market and the consumer price index. They also found that the greater the rate of inflation is the high volatility of stock returns is also high. Overall results indicate that the relationship between aggregate variables and stock returns are important.

The aim of this study is to analyze the relationship between the return of stocks with the book to market ratio, price to earnings ratio, inflation, interest rate and exchange rate in the Malaysian stock market. The study examines the predictive power of the book to market ratio ,price to earnings ratio ,inflation ,interest rate and exchange rate in order to determine whether the phenomenon, there is predictability in the Malaysian stock market, Thailand stock market and Singapore stock market. For this purpose, the sample of Malaysian stock exchange Thailand stock market and Singapore stock market are chosen for the designated period of 2000-2010. And adopted a methodology based on regression analysis.

1.1 Overview of Economy in Malaysia

Malaysia, a middle-income country, has transformed itself since the 1970s from a producer of raw materials to the emerging multi-sector economy. After that came to power in 2003, tried to former Prime Minister Abdullah to move the economy further in the production chain of value-added through attracting investments in industries, high technology, medical technology, pharmaceuticals, an effort which is still under Najib current Prime Minister. Najib also the administration is continuing efforts to boost domestic demand and reduce the economy’s dependence on its dependence on exports. However, exports – especially electronics – remain a great driver of the economy. As an exporter of oil and gas, Malaysia has benefited from high world energy prices, despite the fact that forced the high cost of gasoline and diesel fuel, local communities, along with the government’s fiscal tense, Kuala Lumpur to reduce government support.

The Government also sought to reduce its dependence on the government oil producer Petronas, these supplies 40% of government revenue. Central Bank maintains the health of foreign exchange reserves and its evolving regulatory and limited exposure to Malaysia’s financial instruments and the seriousness of the global financial crisis. However, the decline in global demand for consumer goods hurt Malaysia’s exports and economic growth in 2009, even though both began to show signs of recovery at the end of the year. In June 2010 and will be presented Najib Malaysia Tenth Plan, showing new fixes. Najib has already introduced many reforms in the services sector in a bid to attract foreign direct investment, which has stagnated in recent years [2] .

Moreover, dominated by the trade of raw materials, and now stands behind the economy of Malaysia many sectors. Exports to sustain growth in the economy, especially in the field of electronics, and investments in high technology industries, medical technology and pharmaceuticals are growing. Malaysia does not export oil, gas, and benefit from high global energy prices, but high fuel costs within the country, forcing authorities to cut subsidies on fuel. The GDP grew by 6%, May 2010, which is higher than the expectations of the previous year and stood in positive setbacks such as political unrest in areas along the Thai border. The country is moving forward with the policy of creating a strong knowledge base in research, technology and development. It was also free trade zones, technology parks a high specification set up across the country to help companies and research companies. Figure 1 illustrates how the economy was able to achieve the average.

Figure 1.1 shows that Malaysian GDP growth has improved noticeably, reaching its peak of 10% in financial year 1996, the consequential effects started to diminish again due to the asian financial crisis that started to drive the GDP back again to its low ratios until it reached-7.6% in 1998, after that, the GDP started to grow in 1999 until now, so, excluding instability that started early in 2001.

In addition, the interest rate in Malaysia in the last report of 2.75 percent. Malaysia’s interest rate decisions taken by the Central Bank of Malaysia (Bank Negara Malaysia), Official interest rate is the rate of overnight. , From 2004 until 2010, the rate of interest in Malaysia’s average 2.91 percent, to reach a historic high of 3.50 percent in April of 2006 and the record low 2.00 percent in February 2009. [3] 

1.2 Overview of Economy in Thailand

Thai economy is one of the most powerful in Asia. In the 1960s the economy was mostly agricultural based largely on the rich production of crops such as rice, cassava, maize, rubber, sugar cane, as well as seafood production, primarily of shrimp. Strategic location and abundant natural resources have increased the business opportunities of the country. Witnessed the 1980s until the mid-1990s boom years, and emergence as a diversified, modern, and industrial economy.

Moreover, Thailand enjoys strong growth from 2000 to 2008 – an average of more than 4% a year – also recovered from the Asian financial crisis in 1997-1998. Thai exports – mostly machinery and electronic components, and agricultural goods, and jewelry – to continue to boost the economy, which represents more than half of gross domestic product. The global financial crisis of 2008-09 severely reduces Thailand’s exports, with most sectors experiencing double-digit drops. In 2009, the economy contracted by 2.8%. The Thai government has focused on financing infrastructure projects, local and stimulus programs to revive the economy, foreign trade is still recovering and the continuing domestic political tension and investment disputes threaten to damage the investment climate [4] .

The Gross Domestic Product (GDP) in Thailand contracted at an annual rate of 0.2 percent in the third quarter of 2010. From 1993 until 2010, Thailand’s average GDP growth quarterly 1.01 percent to reach historic high 7.10 percent in September 1993 and the record low of -5.10 percent in March 1998. Thailand’s economy one of the emerging economies that rely heavily on exports, as the value of exports accounted for more than two thirds of GDP. Sophisticated infrastructure and the concept of free economy and projects, and pro-investment policies in general, made Thailand one of the best performers in East Asia. However, overall economic growth fell sharply in 2008 and 2009 and the global recession and political crisis stalled the ongoing large infrastructure projects, investors and the erosion of consumer confidence. [5] 

1.3 Overview of Economy in Singapore

Singapore is a mixture of 63 islands is the smallest country in Southeast Asia. Once in a British trading colony, Singapore became part of the Malaysian Federation in 1963. It became an independent state two years later. Despite the small geographic size of the nation, and Singapore is one of the most prosperous economies in the world, with a strong link to international trade. Singapore capitalist economy is a mixed economy, with minimal government intervention in the market.

Nevertheless, Singapore has a free market economy a high degree of sophistication and success. And enjoy an environment free of corruption, transparent, stable prices, and GDP per capita higher than in most developed countries. Economy depends heavily on exports, especially in the field of consumer electronics and information technology products, pharmaceuticals, and financial services sector growing. The average growth of real GDP 6,8% between 2004 and 2008, but contracted with 2,1% in 2009 as a result of the global financial crisis. The economic recovery began in 2010 and the government expects growth of 3-5% this year. In the long term, the government hopes to create a new growth path that focused on increasing productivity growth, which slipped to 1% per annum in the past decade. Attracted large investments in Singapore pharmaceuticals and medical technology production, and will continue to make efforts to establish Singapore as Southeast Asia’s financial and high technology.

The Gross Domestic Product (GDP) in Singapore contracted 18.7 percent in the third quarter of 2010. From 2007 until 2010, Singapore’s average quarterly GDP Growth was 7.62 percent reaching an historical high of 45.70 percent in March of 2010 and a record low of -12.50 percent in June of 2008. Singapore along with Hong Kong, South Korea and Taiwan is one of the Four Asian Tigers. Singapore has a highly developed and successful free-market economy. It enjoys a per capita GDP higher than that of most developed countries. The economy depends heavily on exports, particularly in consumer electronics, information technology products, pharmaceuticals, and on a growing service sector. [6] 

Figure 4: GDP in Singapore 2007 – Sep 2010

SING.pngSource: http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=SGY

`2.0. Problem statement

Many empirical studies conducted on the factors and variables able to predict the return of the stock. Including these variables such as price to earnings ratio, the proportion of the book to market, the interest rate, inflation and exchange rate.

Market Beta and little or no ability to explain the difference on the stock returns. High returns in the future also shares are normally associated with a lower price in the beginning to the profit rate, and there is a significant positive relationship between book value and the return of stock market by Lam (2002).

Ahmad el (2010), find that both the change in interest rate and change in the exchange rate has a significant impact on stock returns, the change in interest rate have a negative while change in exchange rate has a positive impact.

Li and Huang (2007), the government should be cautious in their implementation of the exchange rate policies as they affect the stock markets in the short term. But that is not supported in the field of statistics that changes in exchange rates affect the stock returns in the long term.

(Nelson (1976), Fama and Schwert (1977), and Schwert (1981), report evidence of an inverse relationship between inflation and real stock returns.

Jung et al (2003) Find real stock returns do not respond to inflation shocks in a manner consistent to do, and for the most part, and to respond in ways predicted by the literature to shocks in interest rates. Stock returns do not appear to respond to the expected economic growth or shocks to economic growth.

These 5 variables are beyond the control of any corporation, and businessmen always wish a steady change in these variable. Because a rapid change in these variable can affect the profitability and returns of the business. That is the very reason; we often see the huge fluctuation in stock market if any change is observed in these variable. As interest rate plays a very important role in returns, many researchers analyze the Impact of the book to market ratio, price to earnings ratio, interest rate, inflation and currency exchange rate on stock returns.

Most studies test the relationship between the return of stocks with the book to market ratio, price to earnings ratio, change in exchange interest rate, change in exchange inflation and change in exchange currency exchange rate in the stock markets in the United States, although there is evidence to support the relationship of the securities markets outside the United States There is no empirical evidence to see if there was a book on the market, price to earnings ratio, interest rate, inflation and currency exchange rate influence the market of the Kuala Lumpur Stock Exchange, Thailand stock market and Singapore stock market. This gap creates a number of reasons for us to undertake this study.Liste Read phonetically

3.0 Research Questions

Several research questions established from the research problem are defined below:

1. Is there any significant relationship between a firm’s price to earnings ratio and stock return in the Malaysian stock market, Thailand stock market and Singapore stock market?

2. Is there any significant relationship between a firm’s book to market ratio and stock return in the Malaysian stock market, Thailand stock market and Singapore stock market?

3. Is there any significant relationship between changes in exchange inflation and stock return in the Malaysian stock market, Thailand stock market and Singapore stock market?

4. Is there any significant relationship between changes in exchange an interest rate and stock return in the Malaysian stock market, Thailand stock market and Singapore stock market?

5. Is there any significant relationship between changes in exchange currency exchange rate and stock return in the Malaysian stock market, Thailand stock market and Singapore stock market?

4.0 Research Objective

The main objective of this study is to determine the relationship between the return of stocks with the book in the market, and price to earnings ratio, and the interest rate, inflation and exchange rates in the FTSE Bursa Malaysia, Thailand stock market and Singapore stock market.

4.1 Specific Objectives

To identify if book to market ratio significantly influence stock return.

To identify if a firm’s price to earnings ratio significantly influence stock return.

To identify if change in exchange inflation significantly influence stock return.

To identify if change in exchange interest rate significantly influence stock return.

To identify if change in exchange currency exchange rate significantly influence stock return.

5.0 Significance of Study

This study is designed to help the investors and business organizations to find out what affects the company’s investment returns and shareholder value. Among the factors that are considered to largely influence the stock returns and earnings-price ratio, the ratio of book to market, and price earnings ratio (P / E), the interest rate of inflation, currency exchange rates and dividend.

This study is sought to benefit investors by helping them to accurately assess the financial position of companies. It aims to help also to make decisions to invest in companies.

This study describes the basic fundamental rates and a macroeconomics variable in the process of stock returns so far does not exist. Moreover, the price-to-earnings ratios, book-to-market ratios, inflation, interest rate, currency exchange rate as well as returns past the explanatory power of the considerable divergence in cross-section of expected returns, especially over longer periods of time even after controlling for market risk, but they can be used as tools in the formation of market timing and strategic asset allocation in emerging markets equities.

6.0 Chapter Summary

This chapter discusses the economic situation in Malaysia, Thailand and Singapore , followed by discussion of research issues and problems, research questions and objective research and finally the significance of this study.