Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on June 29, 2020 - July 5, 2020

RETAIL participation in Malaysia has been on the rise since early this year, particularly after the massive sell-off in March.

The return of retail investors is reflected in the numbers: As at May 31, 2020, there were 30% more new CDS accounts opened than a year earlier, according to Bursa Malaysia (see “Trade in an informed manner, says Bursa CEO” on Page 58).

This is a phenomenon not seen on the local bourse for over a decade. A CLSA report on June 4, noted that retail participation peaked at 59% in 1999, and dipped to a low of 21% in 2016. But in April this year, it surged to a high of 40% on certain days.

CGS-CIMB Research, in a June 23 report, says retail investors’ share of daily trading value rose to 36% in May compared with the past five years’ average of 20.6%.

The research house highlights that retail investors have been net buyers — by RM5.9 billion from Jan 1 to June 18 — in the Malaysian equity market.

“Their net buying was 62% of total net buying by local institutions of RM9.5 billion for the same period. This helped to offset the net outflow from foreign investors totalling RM15.4 billion for the period and we are of the view that this was one of the key factors in supporting the Malaysian market,” it says.

In contrast, foreign funds continued to be net sellers on Bursa for the 18th week in a row as at June 19, offloading a net RM15.7 million of equities year to date, according to MIDF.

Many of these retail investors were chasing short-term gains from rotational plays in glove, technology and oil and gas (O&G) stocks.

Higher retail participation is not unique to Malaysia, but is seen across the globe. Neighbouring Indonesia reported that 52% of trading value in June came from retail investors. In China, retail investors made up 80% of trading activity on the Shanghai bourse recently. Meanwhile, in South Korea, high retail participation prompted its financial regulator to warn of increased volatility, though the widened investor base has added liquidity to markets.

According to a survey of 1,122 investors by CGS-CIMB conducted over 10 days early this month, the recent surge in interest in the stock market is because investors are looking for assets that offer higher returns. The three biggest sources of funds deployed to invest in the stock market were savings, income and money set aside for other hobbies or purposes.

Although most of the new retail investors are said to be young, more than half of those surveyed by CGS-CIMB were aged 41 and older, while the remainder 47% were aged 30 to 40.

An earlier survey by CLSA found a higher proportion of young investors (56%) aged 40 and younger, albeit with a much smaller sample size of 163.

While the surveys revealed much about the retail investors, just who are these investors, and what are their trading strategies, if any? Do they look at the stocks’ fundamentals before making a decision, or are they merely playing the market? What kind of stock-picking approach do they have?

Steve Lian, 33, made a comeback to the stock market recently. Although he started buying shares a few years ago, he stopped when losses piled up.

“I am back to the market after the positive sentiment seen in the stock market. I made about a 20% gain in the past few months, mostly from O&G stocks. I don’t have many stocks in my portfolio right now because I feel prices are a bit too high. I will wait for positive indicators before I enter the market again,” says the insurance agent.

“We have not seen such a liquid market for quite some time,” notes investor Vincent Tan, 35.

Having been in the market for a couple of years, the R&D manager says the current market, though volatile, does offer profit-making opportunities for investors like him.

“In the past, we could hardly make fast and good profits within a short period of time as the sentiment wasn’t good. Previously, when a stock dropped, it took a longer time to pick up, but now, due to higher trading volume, you can see stock prices easily moving up.”

Tan says given the strong market momentum, day trading is the right strategy.

“During the MCO (Movement Control Order) period, I focus on day trades because I aim for short-term gains. What I would do is focus on five to 10 stocks and keep monitoring their share price movements. Currently, I am more into sectors I am familiar with, such as O&G and glove stocks. O&G stocks are a good bet in view of higher upside than downside, judging from the current Brent oil price of about US$40 a barrel.

“Some stocks have great investor participation. When there is high volume, you have more opportunities to buy and sell. It is not so difficult to earn 5% to 8% profit. I will sell when I make 8% to 10% gains. Once the stocks drop more than 5%, I will sell and cut losses. So far, I have been making profits with this strategy.”

 

Shorter holding period

For Tan, the six-month loan moratorium is one reason he has been active in the market.

“Because of the measure, I am not too worried about my finances. More people are willing to buy shares in view of the soft economic outlook. For those who don’t have much cash, short-term trading is a better option,” he says.

Another investor, who declined to be named, agrees, saying that the stock holding cycle should be shorter right now in view of the high stock prices. “We cannot discount the possibility of a market downturn, but as long as you go for stocks with high liquidity, it will be easier to buy and sell. You have to take profit when you make some gains. I don’t trade too many counters at one time. Usually, I have three to five stocks in my portfolio.”

Like most day traders, Tan says technical charts are helpful in determining stock movement. “I am not saying we can fully rely on stock charts, but they do provide good indicators on how the shares may move, especially when you do short- to medium-term trading. I have learnt a few types of charts.”

He adds, “Fundamentals are just one of the factors affecting share price movements. Most of the time, they are affected by market sentiment. Therefore, you have to look at the buying momentum.”

Lian also relies on technical charts and finds them to be quite accurate. “Then you know the support and resistance levels for the stocks, so that you won’t buy at high prices,” he says.

“When I make a 10% gain from a stock, I will just sell it and look for other stocks. Likewise, I will also sell when a stock has dropped more than 10%.”

He says it is very important to study the stocks that he is interested in, including their market capitalisation and the companies’ cash flow and profitability.

“For the short-term strategy, I will buy stocks that have tumbled substantially. Then I sell the next day. When there is a huge correction, it will be followed by a technical rebound, so you can make some gains from that. Over the long term, I will buy stocks with growth potential and below their average prices. It is important to conserve cash and buy when a correction comes.”

Ross Stephenson, 27, who has been investing in the stock market for two years, takes a different tack. He is more of a value investor with a balanced portfolio of blue-chip and small-cap stocks.

“I allocate 40% to 50% of funds for blue chips; the remainder, I put in moderate to risky stocks. For blue-chip stocks, I will just hold. For small-cap stocks, I might consider selling after booking a 20% profit. Currently, I have 25 stocks in my portfolio with a return of 10% to 15%. The overall portfolio is positive but some counters are very bad,” he says.

Stephenson operates an entertainment outlet and has been more active in the market recently.

 

Outperforming the professionals

Almost all equity funds invested locally for the three-month period ended June 12 reported positive returns after the rebound in the stock market. Close to 60% of funds raked in double-digit returns.

Overall, the three-month average return for equity funds was 13.19%, and 12.35% and 14.21% for non-Islamic and Islamic funds, respectively.

Over the same period, the FBM KLCI gained 7.1%. Year to date, the benchmark index, however, has declined 5.4%.

With claims of attractive gains by retailers and with the rise in their participation, will professionally managed funds such as unit trusts lose their shine? Areca Capital Sdn Bhd CEO Danny Wong says unit trust funds still have their value in terms of diversification.

“Individual investors have limited capital to diversify. If you concentrate on one to two stocks, the risk is there. Nowadays, investors want to have a proper allocation with a diversified portfolio, so equity funds suit them.”

Moreover, he believes investors may not have enough time to monitor the stock market as the economy has reopened.

 

Trading disruption

On a separate note, with the increase in trading volume, certain trading platforms have faced technical disruptions — a source of frustration for investors owing to the opportunity cost from being unable to execute trades.

Disgruntled users of Rakuten Trade, a fully digital equities broker, say technical problems are a common occurrence. Its trading platform was hugely popular and saw a 100% month-on-month increase in new trading account openings in April, of which 64% were opened during the first phase of the MCO.

In a note issued to its clients on June 19, Rakuten said: “Like other players, we are recording an unprecedented high traffic during a period of extraordinary trading activities in the securities market. This has caused intermittent connection issues during peak periods and longer response wait times.”

It gave the assurance that upgrades were underway.

“This is where you see planned system downtimes, usually communicated through the platform in advance. We are awaiting delivery of another high-spec server to further stabilise the system,” it said.

Rakuten did not respond to queries from The Edge.

With the current flood of liquidity, MIDF Research does not rule out the possibility of a “market bubble burst”.

But interestingly, even the retail investors do not think the party will last.  

Around 80% of the respondents in the CGS-CIMB survey believe the current market rally may not last more than six months. On factors that could trigger profit-taking, their biggest concerns are a sharp fall in global stock markets, an economic recession, external factors and politics.

If they are proven right, then the jump in retail participation could just be a flash in the pan as retail investors exit the market when the rally winds down.

 

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