This article first appeared in The Edge Malaysia Weekly print edition on September 12, 2022
Rising vulnerabilities in a post-pandemic world
As we progress into COVID-19 endemicity, the aftermath of the pandemic has increased vulnerability on multiple fronts. The unfavourable external environment is expected to heighten uncertainty on our short-to-medium path to recovery. Continued supply-chain disruption, a hike in commodity prices and inflation, as well as increased geopolitical tensions are the macro vulnerabilities with potentially harmful consequences for middle- and low-income economies alike. Malaysia will not be spared.
At the time of writing, the Malaysian growth outlook for 2022 looks promising with strong growth in first-half 2022 at 6.9% compared to the same period last year, mainly supported by low-base effects and strong pent-up demand. Inflation rate, despite increasing to 4.4% in July 2022, is still relatively low compared to some other parts of the world although food inflation, which was the main contributor to the rise in inflation, will likely remain high until commodity prices and the US dollar softens.
More worryingly, as with the global economic outlook, potential downside risks to growth have intensified. The combined effects of economic weakness and higher cost of living will make it harder to make ends meet, especially for lower-to-medium income households due to their lower resilience related to their higher risk of income loss and higher cost-of-living.
The Malaysian Institute of Economic Research (MIER)’s second quarter 2022 consumer sentiment index (CSI) has dipped to a 4-quarter low of 86 points (a 23-point quarter-on-quarter drop) as more low and middle-income households grew increasingly worried about inflationary pressures. In contrast, those from higher income brackets were more optimistic of the future. This underscores additional pressures for the vulnerable and widening inequalities, which will become even more prevalent in the context of a rapidly changing future due to technological advancements, the rise of newer business models, changing demographics leading to shifting consumer and investor preferences, as well as the acute war for skilled talent.
Understanding the financially vulnerable investor
These challenges are complex and will require a diverse set of policies. There is a clear need for structural reforms over the medium-term to improve our productivity and innovation capacity, but there is also a parallel and urgent need to strengthen support and financing mechanisms affecting the targeted, vulnerable segments in the nearer term.
Capital markets can be a vital mechanism not only for financing the recovery from the pandemic crisis but also for facilitating greater financial inclusion. The pandemic has widened the income gap and inequality between the rich and the poor, where income distribution for the B40 and M40 declined while income distribution for T20 group increased in 2020.
With falling income levels and increasing inflationary pressures, the low- and middle-income households could find it difficult to make ends meet, leaving little for savings. In the current situation, addressing financial inclusion continues to be challenging. However, with meaningful access to a diverse set of products and services for all segments of the population, financial inclusion still can contribute to inclusive growth.
Last year, the Institute for Capital Market Research Malaysia (ICMR) published a report titled “The Rise of the Millennial and Gen Z Investors: Trends, Opportunities and Challenges for Malaysia” to understand financial attitudes and behaviours of the largest generational cohort with growing power to influence consumer and market trends in the future.
The findings of our research showed that even within the same generational cohort, there were very distinctive demographic and behavioural differences due to a combination of individual and structural factors such as their household income, geographical differences, financial literacy and confidence, as well as risk tolerance levels.
The study also provided additional insights into the more nuanced behavioural traits of those who were not accessing capital markets compared to those who already invested in a diverse range of products, and how some investors perceived the role of certain products such as Amanah Saham Nasional Berhad (ASNB) funds as a part of their savings and retirement portfolio. Understanding these differences matters because financial inclusion policies should consider enhancing market penetration through understanding the different barriers, needs and preferences of different types of investors.
The same goes for a key challenge faced by regulators and policymakers today, on the increase in vulnerability especially as the financial resilience levels of the vulnerable segments were more adversely impacted over the course of the pandemic. The third Capital Market Masterplan (CMP3) launched by the Securities Commission Malaysia (SC) in 2021 identifies empowering investors for a better future as a key developmental thrust, while also prioritising efficiency and outcomes in protecting investor vulnerabilities with a fit-for-purpose regulatory architecture as well as effective supervisory and enforcement approach.
Nonetheless, identifying and supporting vulnerable investors, albeit critical, needs to be systematic and consider the varied circumstances which can make someone financially vulnerable. Vulnerability is, inevitably, a notoriously difficult challenge to tackle given the varying scenarios in which we can find ourselves vulnerable. It is also not sufficient to only identify one type of vulnerability – for example, reaching a particular age – as the trigger event for vulnerability as unexpected inflection points can occur at any stage of our life, changing our circumstances.
In addition, some may be at risk temporarily; perhaps they are in between jobs while others might be permanently at risk (for instance, due to a terminal health condition). The changing demographic landscape as well as structural trends such as rapid digitalisation and differing levels of financial literacy and sophistication of investors makes understanding vulnerability an even more complex challenge.
Therefore, being able to identify and understand the varied needs of different vulnerable segments will help to facilitate the empowerment of investors, which is aligned with the SC’s overarching objectives. In this respect, ICMR will continue to provide ongoing research in this critical area to complement the SC’s strategic objectives in delivering its development and regulatory thrust for investor empowerment and protection of investor vulnerabilities.
To learn more, read ICMR’s full research paper, New Age Vulnerabilities: Understanding Investor Vulnerability Within the Malaysian Context.
