6 factors that moved the markets

This article first appeared in Capital, The Edge Malaysia Weekly, on December 30, 2019 - January 05, 2020.
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THE excitement has been elsewhere most years with not much joy at home — this could be one way of describing the performance of the Malaysian equity market in the decade that started in 2010.

One saving grace for the FBM KLCI is that it climbed 26.8% between 2010 and 2019 as at Dec 23. However, this is a paltry increase compared with that of indices in other markets, such as the Dow Jones Industrial Average (DJIA).

Fresh from a severe subprime loan crisis in 2008, US equity bulls picked up the pieces and marched ahead for 10 years. The DJIA has more than doubled since recovering from the crisis while the Standard & Poor’s 500 Index has rocketed 184.3% and the Nasdaq has soared 295%. And the equity bulls have not taken a break this Christmas, with the indices still moving upwards in the last few trading days of the year.

Likewise, the TIP markets — Thailand, Indonesia and the Philippines — have seen their benchmark indices more than double. Of the three, the Philippine Stock Exchange has seen the highest increase, soaring 157.9% over the past 10 years, followed by Indonesia’s Jakarta Stock Exchange (148.8%) and the Stock Exchange of Thailand (114.2%).

Compared with their performance, the FBM KLCI has had the worst performing decade since 1979. The local benchmark index saw a super bull run between 1980 and 1989 when it soared 173.5%.

The climb continued in the following decade, when it gained 43% between 1990 and 1999 — the decade when the Asian financial crisis swept across the region and sparked a bloodbath in the stock markets in 1998. It continued to rise at an even stronger 58% gain the decade after, despite the onset of the global financial crisis in late 2008 that originated from the subprime mortgage crisis, which brought down Lehman Brothers, a more than 150-year-old US financial services firm.

Another blow to the Malaysian market in the past decade has been the sharp depreciation of the ringgit. During the period, the local currency lost 20% of its value against the greenback — its worst performance since the 1998 Asian financial crisis.

Why have the bulls run elsewhere? We list six factors.

 

1    Malaysia’s own set of domestic problems

Crude oil — Oil revenue is a large contributor to the government’s coffers. Strong crude oil prices would mean fuller coffers for the government, which would have more to spend while being able to rein in its fiscal deficit. The opposite would happen if oil prices were to fall.

Crude oil prices were high, at above US$80 per barrel, between 2010 and 2014. At the time, the ringgit regained its strength, hovering between RM3 and RM3.20 against the greenback.

When oil prices lost ground in late 2014, so did the ringgit. The local currency breached the RM4 level — for the second time in 50 years — and has remained weak since then given that oil prices have averaged at about US$60 per barrel in the last five years of the decade.

The price movements of two types of oil — crude oil and crude palm oil — have a significant impact on the local market given that oil and gas (O&G) and plantation are the two major sectors on the local bourse. When they are out of favour, Bursa Malaysia would be less appealing to investors, especially foreign investors. This is more so since Bursa is short of new economy stocks, such as the likes of Apple, Facebook and Google.

 

Fiscal health — Weak crude oil prices have raised concerns over the government’s fiscal health and its ability to spend more to stimulate the domestic economy.

Furthermore, the Goods and Services Tax was abolished and its replacement, the Sales and Services Tax, does not seem to be the best substitute in terms of being able to replenish the government’s coffers. The high national debt that the current administration inherited from the previous government has also curbed the government’s spending power.

When the economic outlook is patchy, it does not augur well for corporate earnings prospects, hence investors are shying away.

 

Political uncertainties — It might be too early to draw any conclusion on the performance of the Pakatan Harapan government. However, one of the main factors that has kept investors on the sidelines of the local stock market is the uncertainty over the planned handover of power from Tun Dr Mahathir Mohamad to Datuk Seri Anwar Ibrahim.

Speculation on the transition aside, investors prefer to wait for the dust to settle on the political front and for there to be certainty on policies before investing in the country.

“Malaysia has not really been a major beneficiary of macro factors in the last decade. This is simply because we are not as competitive as other countries in some areas,” says Geoffrey Ng Ching Fung, investment adviser and director of Fortress Capital Asset Management (M) Sdn Bhd.

“We did not really benefit from the quantitative easing programmes. I think in the first five years, we did, to some extent. But since then, our stock valuation has been rather toppish. There are more bargains to be had outside Malaysia. Because of the long-drawn-out political issues in our country, foreign investors are not particularly keen on us.”

 

 

2    Low interest rates

It was the decade that interest rates stayed consistently low, which, in turn, was a boon for economic growth and equity markets.

This could be seen from the US Federal Reserve’s low rate and the record-breaking performance on Wall Street — in other words, money always seeks better yields.

“When interest rates stay low for this long, people will continuously adjust their return expectations on equity against interest rates (via both so-called cost of capital calculation and dividend against interest rate),” says a foreign fund manager.

Interest rates in developed economies such as the US, eurozone and Japan had been low during the decade for various domestic reasons. And that encouraged the influx of investment money into equity markets.

The low interest rates also brought down borrowing costs — a blessing for the corporate world and consumers. The business community could borrow at low rates for expansion, helping to sustain earnings growth, while consumers could spend more as loans were cheaper.

The loose monetary policy had been the main fuel for global growth during the decade.

The Fed kept interest rates low in the early part of the decade as the US economy needed the extra boost after the subprime mortgage crisis.

Just when the central bank began talking about unwinding quantitative easing (QE) by raising interest rates — and investors started to be fearful of a major correction in the US market, followed by a ripple effect globally — the US-China trade war started. This put the brakes on global growth, prompting Fed chairman Jerome Powell to cut interest rates three times in 2019 — a move to keep the growth momentum going in the country.

Meanwhile, interest rates in the eurozone have been trimmed to zero since March 2016 to try to lift the bloc out of its economic doldrums. A major problem that has been plaguing the region is the lack of cohesiveness in terms of the fiscal policy of individual member countries, even though they have a common currency. Currently, not all members are on an equally strong footing fiscally to be able to support the currency.

European Central Bank governing council member Klaas Knot has voiced his concerns about the prolonged low interest rate environment, which could encourage unnecessary risk-taking in investments.

Klaas, who is also the Dutch central bank president, commented that the current low rates lead to excessive risk-taking among investors, while the younger generations may feel that they have to increase their savings.

Interest rates in Malaysia had been hovering in a tight range of 3% to 3.25% for most of the decade after Bank Negara Malaysia raised the overnight policy rate several times, from 2% in 2010 to 3% in May 2011.

Economists concur that the central bank is unlikely to raise rates soon due to the high household debt and uncertainties over economic growth in the country.

 

 

3    Quantitative easing (QE)

It is estimated that central banks in the US, eurozone and Japan have pumped in US$10 trillion through the purchase of financial assets such as treasury bills or debt paper since 2009.

That move has, in turn, released more money into the financial systems,  which has flowed elsewhere globally seeking yield. One destination has been equity markets.

To recap, there was an influx of liquidity into Asia, the rare sweet spot of growth in the early part of the decade, shortly after the global financial crisis, thanks to the QE programmes. Consequently, the region began to experience asset inflation.

“Massive QE programmes post-2008 global financial crisis flooded the global investment market with ample liquidity. In the process of seeking a home for returns, the liquidity has been responsible for the inflation in various asset classes, including equities, for the past 10 years,” says TA Investment Management Bhd chief investment officer Choo Swee Kee.

The QE programmes have helped grease the wheel of growth over the past decade, particularly shortly after the onset of the global financial crisis that crippled the banking system in developed nations and led to liquidity drying up.

But some believe the programmes have had unfavourable effects on the world economy, with doomsayers warning that the adverse consequences could outweigh the benefits the measure has brought.

Indeed, investors are aware of the risks. When the US Federal Reserve started talking about unwinding its QE programme by selling financial assets, it jolted equity markets, particularly those in the US, which have enjoyed one of the longest uninterrupted bull runs in history. A correction is deemed long overdue.

“I believe any time liquidity is pumped into the capital markets, equity markets will benefit. However, policymakers need to strike a balance because too much liquidity for too long a period of time will inflate asset bubbles,” says a corporate adviser.

 

 

4    Trade war and Trump

Perhaps only an astrologer could have observed the alignment of the stars 10 years ago and predicted that a future US president would start a war — not with weapons but by attempting to derail another country’s economic growth.

The protracted US-China trade war, which was arguably started by US President Donald Trump, has had an impact on global economic growth and contributed to market volatility.

This is probably the worst situation the world has seen since the end of the Cold War between the US and the then Soviet Union in 1991.

Recall that the US-China trade tensions deepened when a 10% tariff was levied on US$200 billion worth of Chinese imports in September 2018. China retaliated by levying tariffs on US$60 billion worth of US imports.

In May 2019, the US increased its tariffs on Chinese imports — which included semi­conductors and integrated circuits — from 10% to 25%.

One positive effect of a trade war is trade diversion. Malaysia was expected to be one of the beneficiaries but this has yet to be seen.

A fund manager, who prefers to remain anonymous, says the US presidential election is not just a major event for Americans but also the world because when the US sneezes, the world catches a cold. Trump, who has been in the White House for about three years, has certainly demonstrated the reach and influence of a superpower to the world.

The US is a big export market for many countries, including China, and this is the trump card of the US president.

“Trump promised to ‘make America great again’ by starting a trade war with China, and that has rocked markets worldwide. Any protectionism is bad for the global economy,” says the fund manager.

“After Mikhail Gorbachev, the last leader of the Soviet Union, ended the Cold War with the US, global growth gathered pace in the 1990s because of more vibrant international trade.

“On top of that, Deng Xiaoping began to liberalise China and opened its doors to the world for foreign investments and that helped to drive global growth as well. Trump is now doing the opposite of that,” he says.

Uncertainties arising from a trade war are always factors that add to the volatility in equity markets. It is simple — no trade and no exports means no earnings growth, and highly trade-oriented economies such as Malaysia are the most affected.

The US-China trade dispute could be a long-drawn-out affair, and whether or not it will end may depend on the results of the next US presidential election. Thus, Maybank Asset Management Malaysia says exports are unlikely to be a strong growth engine in the near future.

 

 

5    The mighty rise of tech

Nearly 20 years after the dotcom bubble burst, the shares of technology firms have become popular with investors again, outperforming all other sectors to emerge as “new economy” stocks.

It is noteworthy that US tech companies have been dominating the global market since the internet was commercialised in the mid-1990s.

In fact, the term “GAFAM” was coined to describe the top five US tech brands of Google, Apple, Facebook Inc, Amazon.com Inc and Microsoft. The acronym FAANG was later popularised to represent Facebook, Amazon, Apple, Netflix Inc and Google.

Chinese tech brands caught up quickly, with Huawei, Xiaomi, Oppo and Vivo making an impact on our lives in the past decade. Chinese e-commerce giants such as Alibaba, Tencent and ByteDance also transformed our shopping habits and social interaction through their platforms Lazada, Shopee and TikTok respectively.

With these giants making their way onto the stock exchanges, the rise of technology has not only provided interesting themes and trading ideas for investors but also changed investing behaviour.

Phillip Capital Management Sdn Bhd chief strategist Phua Lee Kerk says tech stocks and brands related to the digital economy generally performed well in the past decade.

Following the dotcom bust, he says, there was a major correction, or rather a re-rating, of the tech sector.

“Today, we have companies such as Amazon and Google that survived the dotcom crash and newcomers like Tencent and Alibaba. [We also have new disruptors], for example Airbnb, which is hurting the traditional hotel industry, and Uber and Grab, e-hailing operators that are disrupting the traditional taxi industry. The same goes for the banking and stockbroking sectors,” he tells The Edge.

“When we think about it, most of them don’t really have a totally new business model; their concepts are not groundbreaking. For instance, P2P (peer-to-peer) is quite similar to moneylending in the Chinese community while ECF (equity crowdfunding) is like borrowing money from family and relatives.”

But with the help of technology, there is wider reach and faster implementation of P2P and ECF, he adds.

Chris Eng Poh Yoon, chief strategy officer at Etiqa, the insurance and takaful arm of Malayan Banking Bhd (Maybank), opines that technology is the biggest factor that dictated stock market performance in 2010 to 2019, and will continue to do so in the coming decade.

“When you have technology, quantitative investing and artificial intelligence, the behaviour of investors and fund managers will change. The future of investment is not in the hands of fund managers but in the hands of programmers and AI,” he says.

“The way people are investing has changed a lot. In the last 10 years, there were a lot of passive investments via ETFs (exchange-traded funds) and quantitative investments, so brokerage fees have been squeezed.”

Franklin Templeton Emerging Markets Equity portfolio manager and research analyst Ismar Isqandar Izhar notes that in the last 10 years, the FBM KLCI’s and the FBM Emas’ market capitalisation has more than doubled.

“The tech sector has seen significant improvement in market cap; it has grown multiple times since 2010 due to an increase in technology adoption for smartphones and other consumer products. Higher demand from industrial and manufacturing automation has also contributed to the performance of the sector,” he says.

A fund manager says the likes of FAANG stocks have helped drive interest in the stock markets, especially Wall Street. “If you look at Microsoft and Apple, the market cap of the two stocks has exceeded US$1 trillion. This says it all — where the money has flowed over the decade.”

Yet, as the industry grows, it is leaving Malaysia’s stock market behind. According to the fund manager, there is still a lack of new economy stocks on Bursa Malaysia. “Perhaps that explains why the Malaysian market is still looking unattractive (among the world’s major markets) because most of the stocks here are so-called old economy stocks. The saving grace is that there are semiconductor stocks for investors to ride the growth story on the tech theme as smartphones are getting smarter with advanced technology.”

 

 

6    GLCs and corporate champions

Like it or not, the change of government in May 2018 had an immediate impact on the corporate world, especially government-linked companies.

The crowding-out effect brought about by the government has been ongoing for close to two decades, seeing consolidation among the GLCs.

For the private sector to come back in a big way and to  be competitive and a major part of the economy again will take just as long.

Geoffrey Ng Ching Fung, investment adviser and director at Fortress Capital Asset Management (M) Sdn Bhd, recalls that the structural drivers of the past 10 years were essentially the products of government, namely corporate champions, mainly from the GLC sector.

“The GLICs (government-linked investment companies) were the ones with all the capital and they structured these GLCs in such a way that they would dominate the local marketplace. That drove market performance. The GLCs, whether Tenaga Nasional Bhd, Malayan Banking Bhd (Maybank) or CIMB Group Holdings Bhd, are the ones that had access to cheap capital and they also own strategic assets in their respective industries,” he says.

On their part, sovereign wealth fund Khazanah Nasional Bhd and state-owned fund Permodalan Nasional Bhd turned many of the GLCs into regional champions.

Today, Axiata Group Bhd, IHH Healthcare Bhd, CIMB, Maybank, Sime Darby Bhd and RHB Bank Bhd are regarded as corporate champions in their respective industries. Over the years, especially the past decade, these homegrown GLCs have established a strong business presence in other countries in the region.

Ng says entrepreneur-driven companies also performed fairly well in the past decade. “Companies like Dialog Group Bhd and Inari Amertron Bhd have taken their entrepreneurial spirit to the global marketplace. That’s how the market was shaped in the past decade or so.”

He sees the private sector driving growth in the coming decade. “The Malaysian stock market is going through a transitional phase. The GLCs were the driving force but they have become fairly muted nowadays. That’s why we see less momentum in the market. We have not seen much earnings growth.”

Ng expects the local market to be an underperformer for the next few years at least. “It is not just Malaysia’s stock market but its entire corporate sector that is going through a transition. The government is not as big a supporter of corporations anymore. Corporations and the private sector need to stand on their own two feet.”

 

 

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