Yvonne Tan of the online
STAR interviews fund manages against the backdrop of a deluge of foreign funds tsunami-ing into Bursa KL beginning November 2010.
The stock market barometer continues to hit historical highs even until today. Will it have more bounce or could it hit a bump in the Year of the Rabbit?
Call it the January effect, a pre-lunar rally or a pre-election run. In fact, call it whatever you want but this is the fact the stock market has never, in its history, risen to current levels before.
Investors cheered at the beginning of this week when the 30-stock key benchmark index, the FTSE Bursa Malaysia KL Composite Index hit a fresh high of 1,533, up 14.5 points or 0.96%.
In the first week alone, it has risen more than 2.5% in ringgit terms and 2.3 % in US dollar terms.
Daily trading volumes have also been robust, crossing the
average 2 billion mark against the average of some 1 billion last year.
“Granted, the index is not the perfect gauge as it is only made up of 30 component stocks but the positive sentiment is contagious and it is spilling over,” remarks a market observer. [Caution: as it is not really that representative!]
The reasons for such exuberance includes stoked expectations of a general election in the first half of this year, massive global liquidity arising from quantitative easing in the Western world, a rising ringgit and commodity prices and a firm economic outlook, or at least economic recovery stories in most parts of the world.
This begs the question is the current upswing more than just a flash in the pan?
Laggard compared to the rest
Noteworthy is that the Malaysian stock market, relative to most of its ASEAN counterparts, has not gone up as much in the past one year.
For example, last year, markets in Indonesia, Thailand and the Philippines were up 54%, 61% and 52% in US dollar terms as opposed to Malaysian equities which had risen 31%.
“That alone is more like reaching the top step of the kitchen ladder rather than the stars in the sky,” says Gerald Ambrose, the head of Malaysian operations at Aberdeen Asset Management.
Ambrose is quite confident that the current rise in the Malaysian stock market will continue. “It is real and the momentum appears to be intact,” he tells StarBizWeek. Naturally, no one quite knows how long the rise will continue.
“It could go on for the whole year to produce a huge equity bubble by the end of it. Or it could all go wrong tomorrow!,” says Ambrose.
Vincent Khoo, head of research at UOB KayHian writes in his 2011 market strategy report that macro domestic conditions in the first half of the year are favourable for a healthy market, with benign inflation and a firm economic outlook, boosted by the unfolding of the New Economic Model (NEM) which brings with it various degrees of financial liberalisation and mega infrastructure projects.
However, the second half of the year's performance, he says, would have less upside and as such, Khoo is advising clients to switch to being defensive, in anticipation of a “jerkier” market due to possible resumption of interest rate hikes here and less accommodative monetary policies in the West.
OSK Research head Chris Eng shares the same sentiment with Khoo, saying that the first half of the year is well positioned for a robust stock market while the remaining two quarters of the year could see some volatility largely due to the same reasons.
“For the time being, you can call it a pre-lunar rally, an election rally or the Capricorn effect, but the effect is the same!” says Ambrose.
Liquidity Rush
The massive amounts of liquidity totalling hundreds of billions of US dollars released from the credit and quantitative easing (QE) measures by the US and other developed countries such as Japan, European Union (EU) zone and Britain are currently flowing into high growth countries including Malaysia, in search of better returns.
“With the present low interest rate regime globally, hence low yields on fixed income and deposit instruments, it makes sense to be overweight on equities and Asia will be the focus of global investment funds given their growth potential,” says Danny Wong, CEO of fund management firm Areca Capital.
In this regard, a recent report by Credit Suisse Group AG showed that net foreign buying in Malaysian stocks surged to RM2.6bil in December from RM900mil the month before.
From the foreign exchange point of view, the weak US dollar is also a push factor for the influx of funds into Asia, encouraging investors to put their money into Asian equities, says Wong.
Last year, the ringgit appreciated more than 11% against the greenback.
“With this influx of investment money into Asia, Malaysia will gain from the spillover effect, if not directly benefit from the inflows,” says Wong.
The macro perspective
From the economic fundamental point of view, major economies such as the US and the EU zones are showing uneven recovery from their last crises, but economists are expecting some stabilisation of sorts in the near-term.
A slew of positive economic indicators from the US recently, for example, suggests that things could be getting better there.
On Tuesday, figures showed that new orders for US goods rose while the reading for the US Purchasing Managers Index a headline indicator for economic activity was also higher at 57% in December. A reading above 50% reflects growth.
Employment figures another key economic barometer were also healthier, rising 100,000 in December, the most since November 2007, according to Bloomberg.
Over in Europe, China has pledged its support for the zone, promising to help it out of its debt crisis by signing multi-billion contracts and buying up its bonds.
Domestically, growth is expected to be slower this year, coming from a high-base effect last year. Economists are predicting the economy to grow at about 5.3% this year from roughly 7% in 2010.
However, the equity market will continue to be supported by still relatively high double-digit corporate earnings buoyed by underlying domestic and global economic activities, says Areca's Wong.
The country's economic transformation programme (ETP) which includes plans to build a RM36bil mass rapid transit system, if wholly and successfully implemented, is likely to galvanise private investments.
Along with the Government's support of domestic consumption spending, the private sector will benefit from the economic growth, notes Wong.
“The implementation of the Greater KL for instance will benefit the construction, property and financial sectors with indirect spillover effect to other related sectors such as raw materials and other infrastructure industry,” he says.
Wong, as a fund manager believes that the confidence and perception towards Malaysia have somewhat improved among foreigners of late, largely due to the recent investment-friendly measures announced.
The lifting of certain controls and restrictions such as foreign holding limits in the financial sector, efforts to cut subsidies and the plan to reduce the country's budget deficit are among the contributing factors to a better perception of the country's transformation, he adds.
One fund manager says the promotion of Malaysia as a global Islamic financial hub has also put Malaysia on the radar screen of global investors.
“Once there is confidence, our “domestic champion businesses” such as the oil palm, glove, oil and gas and gaming sectors will be magnets to foreign funds,” Wong says.
Further supporting these fundamentals are that investors appear to already be overweight on neighbouring markets like Indonesia, Singapore and Thailand, says Aberdeen's Ambrose.
Data-wise, foreign institutions' holdings in Malaysian equities, although off their lows, are only about 22% now versus the peak levels of 27% in 2008.
Adds Ambrose: “Whilst valuations for Malaysian stocks are hardly at bargain basement levels by our calculations, our portfolio is on about 16 times 2011 earnings with earnings growth at a conservative 5% neither does it look anywhere near overvalued.”
In terms of FBM KLCI targets, UOB KayHian has a year-end target which is pretty similar to most research houses in town. It is targeting for the index to reach 1,654 by year-end based on a 2012 forecast price earnings of 14.5 times.
Wong notes many market trend followers believe that the market should enjoy “good times” for the next two to three years since the last financial crisis was in 2007 to 2009 and the market just started rebounding in the second quarter of 2009.
“Further, the expectations of an early election may provide a feel-good factor for a rally,” he adds.
Analysts also note the Government's efforts in reducing its stakes in major Government-linked companies including in Telekom Malaysia Bhd, Tenaga Nasional Bhd and Malaysia Airport Holdings Bhd, which will likely enhance participation from the retail market and foreign investors.
Potential Downsides
What could throw a spanner in the works in the current surge? Plenty, according to experts.
The issue of hot money and how quickly these funds could flow out as it has come into the Asian markets is one main risk.
Everyone knows that Asian economies are currently seeing strong inflow of funds as Western investors try to diversify from the horrors of holding US dollar, Euro and Sterling, Ambrose notes.
Because of this, several emerging economies have imposed various new measures to control excessive inflows of hot money.
“Malaysia has not joined in any of these measures so far (which has restored a lot of credibility in my view), but this remains a great uncertainty for Asian markets this year,” says Ambrose.
He emphasises that the various austerity measures taken up by the US Fed and the European Central Bank to tame their respective deficits in the wake of the financial mess they are in are unprecedented and could result in unforeseen consequences.
Example, Spain said last year it would reduce public investment, slash public wages by 5% and freeze them this year while suspending a raise in pensions.
“Unprecedented measures can result in unforeseen consequences.
There could be more collapses in peripheral EU countries as a result of the measures, which can then derail everything,” Ambrose says.
Inflation could also derail the current rise in regional and global equities. Inflation, particularly cost push inflation caused by higher food and fuel prices hurts the man in the street in terms of higher prices.
Just earlier this week, the price of RON 97 petrol went up by 10 sen to RM2.40 a litre.
“It's possible
that inflation could force Bank Negara to raise rates, hence slow money supply, thus making equities less attractive,” Ambrose says. [Not in a mad rush when equities seems better than the small interest increase of 0.25 to o.5%]
OSK Research warns of political instability including the possibility of wars specifically between North and South Korea as factors which can drag the market down.
In our view, however, the largest potential risk we see for 2011 will be if investors lose confidence in the US economy, and specifically the US dollar,” it says.
Geopolitical risks, contagion effects of sovereign indebtedness, a double-dip recession. All these are risks.
Wong from Areca probably sums it up best when he says: “As always, it is advisable for investors to diversify their investments into various assets classes.”
In terms of fixed income, investors should keep to short-duration liquid bonds as inflation, likely to be driven by cost-push factors such as energy and food price hikes and subsidy cuts, may kick-in soon.
As the say, "If wishes were horses, beggars will ride them."
So, tread softly and look out for potential exits when the stock prices reach your level.
Never be greedy or it will be your undoing!
