Thursday 28 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on March 15, 2021 - March 21, 2021

Loss-making Dataprep Bhd is an example of stocks on Bursa Malaysia with unrealistic valuations and irrational trading patterns. Its share price shot up from a mere 18 sen at the beginning of the year to a high of RM3.15 last Wednesday, without any significant fundamental changes in the company.

The unexplainable rise prompted the stock market regulator to issue a warning, cautioning investors on Dataprep, which plans to seek opportunities when the government rolls out the 5G telecommunications infrastructure.

Dataprep is not the only company that has received a warning. Several others have been cautioned in the past.

In all the cases, the stock price eventually corrected, leaving retail investors with their fingers burnt. Institutional and foreign funds were hardly ever involved in what is described as “pump and dump” stock schemes.

For the longest time, retail investors were not in the stock market. They only returned in force a year ago. Today, they account for more than 40% of the total volume of shares traded on Bursa Malaysia, and 35% in terms of value.

In February, they accounted for 45% of the 168.5 billion shares traded on the exchange. In terms of monetary value, it was 37% of the total of RM93.9 billion worth of shares traded. A year ago, retail investors accounted for hardly 20% of the total volume and value of shares on the exchange.

The trend is global. From the US to Japan, a new class of investors in the form of retail investors has emerged. The advances in online trading, and proliferation of chat groups and forums on various online platforms have facilitated faster information flow and attracted more people to the stock market.

The epicentre of retail trading is the US, where retail investors pride themselves on successfully fighting hedge funds that short-sell stocks. What happened with GameStop Corp, a video game distributor, is the epitome of retail prowess. In the US, retail investors are estimated to account for a third of the total volume of shares traded.

What the army of retail investors lack in experience is made up for by an abundance of enthusiasm and appetite for risk. This explains why stocks such as Dataprep are still active at dizzying heights.

On Bursa, retail investors took positions in glove stocks when the conventional funds would not pay hefty valuations for them, and in the end, ended up being the major beneficiaries of a bullish run on the sector that has been going on for almost a year now.

From gloves, retail investors hopped onto the technology bandwagon towards the end of the year. So far, they have been successful in riding investment themes. Whether they will continue to be a class of investors to be reckoned with after the Covid-19 pandemic is doubtful.

This is because every stock market fairy tale run shares a similar script — a sad ending. And many of the retail investors have not gone through a cycle when the bubble burst.

Predicting the highs and lows of a stock market is almost impossible. A bullish run can go on for a fairly good period and there are no clear indicators on how long it can be sustained. Forecasting the end of a stock market run is equally challenging.

The stock market bubble in Japan peaked when the market was trading at 65 times price earnings multiple. The dotcom bubble in 2000 burst when the Nasdaq was trading at about 35 times price earnings multiple.

The vast difference in price earnings multiples when the bears set into the market points to valuations being a weak indicator in determining when a stock market is going to turn. Even rising asset prices are not an accurate yardstick for determining a stock market bubble.

Today, technology stocks on Bursa Malaysia are trading at well above 50 times earnings, yet there are still people who continue to chase them. Tesla Inc, bitcoin and GameStop are all examples where valuations can go ballistic and yet continue to attract the interest of some segments of investors.

Seasoned fund managers tend to become cautious when stock markets hit their peak. A fund manager observes that the stock market turns a few days after the most optimistic of events unfold.

Currently, everything points to brighter days ahead for stock markets.

Globally, the stage is set for better growth of 5.6%. This comes as the Biden administration in the US passed a US$1.9 trillion stimulus package. Mass vaccination programmes are being rolled out in almost all countries and central banks are committed to an accommodative monetary policy to facilitate growth.

The overriding optimistic sentiments are reflected in the S&P 500, which is at its all-time high.

Domestically, Covid-19 cases have been coming down while the government is pushing for a faster rollout of vaccines. The economy is opening up, paving the way for normalcy to return.

The stock market is still lower than its high of more than 1,860 points reached in April 2018. But in the past one year, retail investors have come out smiling from their investments in glove and technology stocks.

Optimism is at its height now, which means that the only way forward is probably down.


M Shanmugam is contributing editor at The Edge

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