When should companies do share buybacks?

A few weeks back, we wrote about the structural weakness and resulting chronic underperformance of Bursa Malaysia in recent years. The FBM KLCI fell 12.8% from 2013 to end-2020. The Singapore market has not fared so well either, down 10.2%. Both markets were among the worst performing in the region. By comparison, the Standard & Poor’s 500 index has more than doubled while the Nasdaq has tripled over the same period.

This is a worrying trend. A vibrant and healthy capital market is needed for efficient capital allocation that is supportive of sustainable economic growth over the longer term. Part of the problem lies in weakness in the corporate sector. Total profits for Singapore Exchange (SGX)-listed companies more or less stagnated between 2014 and 2019 (before the Covid-19 pandemic distortions), growing at a compound annual growth rate (CAGR) of just 1.5%.

Malaysia-listed companies did even worse, reporting declining profitability and returns on investment — CAGR for net profits was -3.8% — due to serious, underlying structural problems that must be urgently addressed. We have written fairly extensively on this subject in the past. The other major issue is liquidity — specifically, lacklustre liquidity on the local bourse in the last few years.