This article first appeared in The Edge Financial Daily on February 12, 2018

KUALA LUMPUR: About RM56.5 billion was wiped off from the Malaysian stock market last week as the market fell prey to a global stock sell-off sparked by a renewed rise in US bond yields and the prospect of an imminent US interest rate hike to counter rapidly rising inflation.

The benchmark FBM KLCI fell by 2.71% over the past week to close at 1,819.82 points last Friday — the biggest five-day slide since September 2015 when it fell by 3.21%.

Similarly, the FBM Small Cap Index booked a 5.3% weekly loss to end the week at 16,120.74 points. The last time the small-cap stocks fell by more than 5.3% was in August 2015 when it dropped by 7.46%.

After suffering its worst week in three years, is it time to scoop up stocks on the cheap? Not yet, analysts and fund managers said, as they are of the view that the FBM KLCI is not a “screaming buy” at its current valuations.

On trailing price-earnings ratio (PER) basis, other regional peers look more attractive or cheaper than the FBM KLCI and the FBM Small Cap Index.

Currently, the trailing PER for FBM KLCI stands at 16.5 times, which is not far off from its five-year average of 17 times. The FBM Small Cap Index’s trailing PER, meanwhile, is at 116.7 times, which is significantly higher than its five-year average of 24.3 times.

In comparison, Singapore’s Straits Times Index (STI), which fell by 152.58 points or 4.32% over the week to close at 3,377.24 points last Friday, is trading at 11.2 times trailing PER, which is much cheaper than its five-year average of 13 times. Similarly, South Korea’s Kospi, which has dropped by 161.62 points or 6.4% to close at 2,363.77 points, is trading at a trailing PER of 12.3 times, a discount to its five-year average of 18.5 times.

Hong Kong’s Hang Seng Index (HSI) sank by 3,094.36 points or 9.49% last week, its worst week since the global financial crisis in 2008 and is trading at a trailing PER of about 13.7 times. While it remains to be more expensive than its five-year average of 11.4 times, the valuation for the HSI remains more attractive compared with the FBM KLCI.

A fund manager at a local asset management company said the valuation for the Malaysian stock market has always been higher in comparison to most of its regional peers given the strong participation of local institutions in the market.

His remarks are reflective of Malacca Securities Sdn Bhd’s data which showed that local institutions have been supporting the market, with a net “buy” of RM1.48 billion over the week (as at last Thursday).

UOB Asset Management (M) Bhd chief executive officer Lim Suet Ling told The Edge Financial Daily that “within Asia, Malaysia tends to be more stable in temporary sell-offs”.

While this has helped to reduce the volatility of the local stock market, it has also kept the market from experiencing a sharp correction and thus, eliminating the opportunity for investors or traders to buy at a big discount in the event of a correction such as the one seen last week. A comparison with some of the major equity indices in the world showed that the FBM KLCI has among the lowest decline last week, with only the Jakarta Composite Index and Thailand’s SET Index outperforming it.

Earnings growth, price correction lead to buying opportunity

On the contrary, Rakuten Trade Sdn Bhd head of research Kenny Yee is of the view that the recent correction has led to the emergence of value among the companies listed on Bursa Malaysia.

He noted that earnings growth expected this year would help make the valuation even more attractive. Bloomberg data showed that earnings per share for the FBM KLCI is expected to grow by 2.35% in the next 12 months.

“The domestic market was not spared from the heavy selldown seen in the global equity market as investors and traders who were getting used to the green screen and upward lines on their trading terminals woke up to a sea of red. It’s not a crisis, but a healthy pullback after a strong rally seen at the beginning of this year,” Yee said.

According to him, current price weakness represents a good buying opportunity for investors as valuation appears to be more attractive following some of the selldown seen. Among some of the companies that Yee recommends investors to gradually buy following the correction include Straits Inter Logistics Bhd, Binasat Communications Bhd, TRC Synergy Bhd, KUB Bhd and Ahmad Zaki Resources Bhd.

Yee’s optimism about a recovery in the market is in line with most of the fund managers and analysts. Fund managers and analysts contacted by The Edge Financial Daily last week said the correction phase is part of a healthy “sanity” check and that it is short-lived.

Fundsupermart Research analyst Jerry Lee Chee Yeong believes the ongoing global equity market correction will not lead to a crisis. While he pointed out that the selldown is not overdone and could continue for a while more, it is a good time to gradually accummulate on weakness.

“We like Asia ex-Japan, as well as the China market. For Malaysia, we prefer the bigger-cap companies, especially the banking sector,” he said.

For investors who have been “underweighting” Asian and emerging market equities and are considering to add-in position, Fundsupermart Research thinks that this is a good opportunity.

“If fundamentals [of the equity markets that they have invested in] remain sound, stay invested. To sell off everything in fear and panic without considering fundamentals, and [to] re-enter the market again when things start to recover would be a bad decision,” it added in a note to clients dated last Tuesday.